A Look at the U.S. Dollar

July 7, 2008

Take a look at the chart of the five-year history of the U.S. Dollar’s relationship with the Euro:

Back in August 2003, one U.S. Dollar purchased .9184 Euros. As of last Thursday, one U.S. Dollar only purchased .637 Euros, a decline of 30.64%! To put it in perspective, imagine you are going to take a trip to Europe. You reserved a hotel that is €200 per night or $313 per night (€200 ÷ .634 = $313). Leaving out inflation, that same hotel room would have only cost you $217 per night back in August 2003. That’s quite a difference. This is why other countries are griping about the falling dollar: it makes their goods and services more expensive compared to the U.S. Dollar.

Of course there’s another side to this: goods and services purchased in the U.S. with Euros are now cheaper. Using the example from the previous paragraph, a hotel that is $200 per night will cost a European tourist €127 per night. That same hotel would have cost them nearly €184 per night back in 2003 (again, ignoring inflation), or 44% more.

The dollar’s fall also makes imported goods and services more expensive here in the U.S., which means U.S.-produced goods and services are now more affordable when compared to imports and it also makes our goods and services cheaper overseas. This is good for us but bad for other countries.

There are negative aspects to the dollar’s fall. The biggest in my opinion, is with the price of oil. According to OPEC’s President, Chakib Khelil, each 1% drop in the value of the dollar against the Euro, means a $4 increase in the price of a barrel of oil. (I’m not sure how he came up with those numbers.) The dollar is down about 7% against the Euro so far this year. Based on that, about $28 of oil’s $50 price rise can be attributed to the falling dollar.

These trade-offs (and lots of others) are what make the study of economics so interesting.

I’m not saying the dollar’s fall is a good thing, but it does have some benefits.

10 responses to A Look at the U.S. Dollar

  1. Nice perspective.

    I’m not sure where Khelil comes up with those figures about the price of oil either. My annual trips to Canada to take advantages of their traditionally weaker currency are no longer an option.

    Now the Canadians are coming to my state (Maine) for vacations and shopping!

    Good for the store owners along the border towns but not for me!

  2. I have to agree, JLP. I too find this one of the many facets of economics that is so interesting… I guess that makes me a bit of a money geek 😉

    But seriously, I think too many people focus on the doom and gloom of a falling dollar. A falling dollar is not unheard of. In fact, the dollar remaining so strong for so long is more of an exception to the rule than a cyclical rise and fall in value. Besides, the EU is far bigger than the U.S. and it makes sense that once they finally got their economic act unified it would be more competitive than any individual country’s currency. Of course, that’s not to say that this isn’t bad timing for the dollar to drop, what with the oil crunch and all… but it is what it is. Values rise, and values fall… it’s a natural ebb and flow.

  3. I’m a doom and gloomer on the falling dollar because now, for the first time, we are exposed to the fact that the falling dollar did not help our import/export ginormous deficit. We should be at a surplus now given the falling dollar, but instead we are still importing more than we export. That was always supposed to be the great thing about currency fluctuation is the balance in trade that occurs over time. Guess we should have kept all those manufacturing jobs here.

  4. and, don’t forget, if you don’t travel abroad – excepting the connection to higher oil prices from a lower dollar – a lower dollar vs euro affects you exactly zero.

  5. @muddlehead

    Muddlehead, you are incorrect. Any goods (not just oil) that are imported are affected by a weak dollar.

    So, for example, your dollar buys less toys from wal-mart that were imported from China;

    Or, your dollar buys less wine that was imported from France.

    Your statement might be true if the theory of Purchase Power Parity was absolute–but alas, it is not.

    SmBizMan

  6. The connection between the Dollar and the price of oil is that barrels of oil are priced in dollars. So if the dollar is getting weaker the price per barrel must go up, all else being equal. I imagine the 1%-to-$4 figure comes from this inverse relationship.

    So in countries where the currencies (e.g. the euro) are getting stronger vs. the Dollar, they’re in effect getting cheaper gas as the Dollar weakens (since their currency can buy more dollars now and hence more oil for the same amount of euros, etc.).

    And of course, for poor Americans, oil prices are going way up.

    What would the world be like if there was a single global currency, eh?

  7. The falling dollar also means any US-dollar investments that are not hedged are losing value (in local currency terms) for non US investors. That is in addition the the current bear market 🙁

  8. Not to mention the impact for non-US investors. Not only is there a bear market but the value (in local currency) of US shares is dropping due to the fall in the value of the US dollar 🙁

  9. The falling of the US dollar effects us all in many ways. With most of the things you buy at Walmart etc are imported. And even many vegatables at the super markets are imported from Mexico etc.

  10. You are correct about the cost of imports going up. But just because the Euro is gaining value against the dollar doesn’t necessarily mean that every currency is gaining against the dollar, or to the same degree. Some currencies are pegged against the dollar, meaning that when the dollar drops, so does their currency. The Chinese yuan is that way, and has only been appreciating a small amount compared to the dollar. That means the cost of Chinese imports are rising less because of dollar fluctuations, and more because of rising energy and raw material costs. Maybe not much of a consolation, but important nonetheless.