Falling euro influences U.S. economy, consumers, investors, corporations

Strengthening dollar can hurt large U.S. companies, but can help consumers

May 19, 2010|By Gail Marks Jarvis | Tribune newspapers

Only a few months ago, Americans were fretting about a weak dollar, adoring the euro and looking for ways to insulate themselves from the greenback's slide.

They were buying foreign mutual funds to take advantage of stronger currencies. They were adding oil and commodities to their portfolios because natural resources tend to perform well when the dollar is weak. Shoppers were skipping French wine, Italian shoes and European vacations as the falling dollar made them more expensive.

Then, along came the European debt crisis, and all is turned upside down. Now, the euro is plunging. Although you needed $1.60 for a euro in early 2008, on Tuesday it fell below $1.22 during trading as the currency dropped to a four-year low, and some economists predicted parity — $1 per euro — by late this year or in 2011.

The topsy-turvy ride of the dollar and euro shows how quickly conditions can change, upsetting common assumptions. But with that in mind, here are some effects of the weakening euro:

For the consumer

A trip to the gas station will probably become a bit easier to stomach, because oil, priced in dollars, becomes less expensive in the U.S. when the dollar strengthens. In addition, with the European economy slowing, demand for oil is likely to fall, also lowering the price.

Food also is expected to be cheaper as demand worldwide eases and the dollar strengthens, said Brian Dolan, chief currency strategist of forex.com. Lower commodity prices, he said, will increase disposable income, a positive for struggling Americans and the U.S. economy

For U.S. companies

"The strong dollar is a negative for corporate profits," said investment strategist Ed Yardeni. And he thinks that will be particularly true of industrial companies, which will have more competition from Europe.

U.S. companies doing business abroad face currency issues, but many hedge to reduce the impact. Still, when they do business abroad and translate profits, the stronger dollar will reduce earnings from Europe.

And with European products cheaper than U.S. products, consumers in the U.S. and other parts of the world might buy from Europe rather than the U.S. And Americans will be more eager to buy less-expensive imports.

For the economy

Slower GDP growth means another hitch for the economy as it emerges from recession. But it's not all negative.

With oil prices down sharply in recent weeks, Dales estimates that could take 0.3 percent off inflation this year. Cheaper fuel costs can help companies such as airlines, manufacturers and trucking firms.

But the United States is not the only country that could find resistance to higher-priced products with the dollar stronger.

For investors

The flood of money into U.S. investments means that risk-averse savers looking for alternatives to low-interest CDs and U.S. Treasurys are not likely to see near-term relief, although some analysts predict that 10-year Treasurys, now yielding 3.35 percent, could be at 4.5 percent by the end of the year.

Investors who bought European mutual funds or other currencies to bolster their returns when the dollar was weak are suffering. When the euro was strong, and profits were translated back into dollars, American investors made more money on the currency translation alone.

Now, Americans are losing in two ways, on the expectation of declining profits in some countries and on the currency translation. For example, this year Germany's main index, the DAX, is up 3.3 percent, but in dollars investors would have lost 12.2 percent.


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