Who Gives a Buck About a Weak Dollar?
To the casual observer, talk of a weak dollar can seem abstract, confusing and irrelevant.
But it would be a mistake to think it doesn't matter. That's because whether you are filling your car up at an
Exxon Mobil
(XOM) - Get Report
gas pump, buying gold rings at
Tiffany
(TIF) - Get Report
or getting a mortgage with
Countrywide Financial
(CFC)
, a falling dollar can negatively impact your economic well-being.
Regardless of whether anything
can be done about a feeble dollar
, here's what you need to know about what it means and how you can protect your assets and income.
Essentially, when the dollar is weakening, it means the U.S. currency will buy fewer units of a foreign currency than it would previously. For example, five years ago, one dollar would get you 0.85 euros, whereas now it will fetch only 0.63, a 26% decline.
Likewise, the dollar has depreciated 12% against the Japanese yen from its level of a half-decade ago. The greenback is also down 15% against the pound over the same time period. Ultimately, that means higher costs for many of the things we buy, such as gasoline, heating oil, flour, bread and baked goods.
"A weak dollar pushes up commodity prices because they are directly priced in dollars," says Josh Feinman, chief economist Deutsche Asset Management in New York.
But it's not just commodities that are affected. The price of foreign travel is climbing not only due to the higher cost of jet fuel needed to fly you overseas, but also because dollars just don't go as far as they once did abroad.
The stock market, too, stands to take a hit from a weaker greenback.
"It's bad for foreign investors if they invest in stocks of a currency that's declining," says Addison Wiggin, author of
The Demise of the Dollar
.
That's because even if stocks rally, investors can lose money on their investments if the currency falls too much before they cash out and repatriate their funds.
Should the dollar continue to fall, it could eventually spook foreign investors enough to keep their money away permanently. Such a drop-off in demand could hamper returns on shares, although Wiggin says he doesn't think we've reached that stage yet.
Additionally, a falling dollar can mean an increase in the cost of borrowing, say for a house or a car. The U.S. consumer benefits from the fact that the dollar is the bedrock of the global financial system. The greenback is the world's top reserve currency, which means other countries hold U.S. dollars in their coffers much more than any other instrument.
Roughly 60% of all foreign reserves are dollars, and that makes interest rates lower because of the willingness of foreigners to hold greenbacks, says Michael Woolfolk, senior currency strategist at Bank of New York Mellon in Manhattan.
A perpetually declining dollar -- on the order of 20% per year or so -- could eventually lead to foreign countries dropping the greenback as their choice for reserves, he says. The knock-on impact would be higher housing and car payments.
So what to do? Rising prices for Americans are a reality in the 21st century, but avoiding eating isn't.
One technique to alleviate the financial pain might be to
especially when there are bargains to be had. Alternatively,
reduce restaurant dining bills
by cutting out appetizers or reducing alcohol consumption.
Inflation tends to erode the purchasing power of most assets, so savvy investors need to know those classes do better as the prices of goods and services rocket higher.
One age-old solution might be to buy gold. Over very long periods of time, the value of gold has kept up with inflation, although investors should be aware it can be a very volatile investment. The price of the metal is up over 150% from its level five years ago, although it did go through a two-decade long bear market that only ended in 1999.
Two major alternatives include the
SPDR Gold Shares
(GLD) - Get Report
, which owns bars of bullion, or
such as
Newmont Mining
(NEM) - Get Report
or
Barrick Gold
(GLD) - Get Report
.
The exchange-traded funds that track the value of currencies have also been good feeble-dollar busters. Since its inception in late 2005, the
CurrencyShares Euro Trust
(FXE) - Get Report
, which tracks the value of the euro, is up more than 30%. The
CurrencyShares Japanese Yen Trust
(FXY) - Get Report
and
CurrencyShares British Pound Sterling Trust
(FXB) - Get Report
, which track the value of the yen and the pound, are up also, although to a lesser degree.
For investors truly worried about U.S. stock market returns, another option could be to pick stocks in foreign countries. The
iShares MSCI EAFE Index
(EFA) - Get Report
, which tracks market action in Europe, Asia and the Far East, might fit the bill as a broad-based play, or one of the country-specific funds such as
iShares MSCI United Kingdom Index
(EWU) - Get Report
, which tracks British stocks, could be in order.