The U.S. dollar fell to a new low against the euro on Tuesday, thanks to more bad news about home sales. One American greenback is now worth about 0.71 euros, or 0.49 British pounds. Five years ago, the dollar and the euro were about the same in value, which means that a Roman holiday has gotten significantly more expensive. But continental vacations aside, how does the weak dollar affect the average Joe?
With higher prices on almost everything imported from abroad. As our currency loses value, a dollar buys less and less from manufacturers in other countries. Because the euro has been so strong, this effect is especially pronounced when it comes to European imports: All things equal, a pair of eyeglass frames from a European designer that cost about 150 euros—or $192—last September would now go for $211 because of the soft dollar. This puts foreign businesses at risk of losing American customers to domestic competitors; some end up lowering their prices—and losing profits—as a result. But those businesses still need to make up for the shortfall, so they cut back in other ways. A carmaker like Audi or Volkswagen, for example, might start offering fewer models in the United States or stripping some bells and whistles from its vehicles.
The weak dollar can hurt you even if you stick to buying American. Domestic manufacturers can start to raise their own prices, once the cost of European products starts to go up. The euro sticker shock also applies to American-made products that come from European raw materials, like J. Crew's cashmere sweaters or Cole Haan shoes made from Italian leather.
Wal-Mart and Target shoppers probably won't need to worry for the time being, though. Much of what you buy from those mass merchants—toys, stereos, T-shirts—comes from Asian countries where currency values are more or less pegged to the U.S. dollar. A dollar will still be worth about 7.5 Chinese yuan no matter how much value it loses relative to the euro. The big-box retailers also tend to have supplier contracts that are written in U.S. dollars, so there's less currency risk.
But temporary protections like artificially low prices and contracts in American currency can't go on forever if the dollar keeps weakening. Global companies will see their U.S. businesses shrink—not because they're selling fewer products, but because $1 million in sales is worth less than it used to be. Businesses will need to recoup their losses at some point by raising prices. If oil companies had to raise prices for that reason, the effects would be felt throughout the U.S. economy. Eventually—if too many things start costing just a bit more—we could have inflation on our hands.
There is at least one way that a weakened dollar helps American consumers. Armed with strong currency, more Europeans are snatching up property in chic neighborhoods around the United States. This influx of capital could stabilize local housing markets.
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Explainer thanks Beth Ann Bovino and Marie Driscoll of Standard & Poor's, Patricia Edwards of Wentworth Hausen and Violich, and Nihat Bulent Gultekin of the Wharton School of the University of Pennsylvania.