Your Dollar Is Worth Less

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By Jeff Fischer (TMF Jeff)
May 9, 2003

In early 2002, you only needed $0.89 to buy a euro. Today, you need a record $1.14 to buy a euro, an enormous 28% difference. The U.S. dollar is at four-year lows against the euro, meaning that if you're going to Europe this summer, expect everything to be considerably more expensive. So, what's going on with the falling dollar? And what does it mean to U.S. stocks?

The dollar is declining in value against most major world currencies for two primary reasons: The U.S. benchmark interest rate is set at only 1.25% (a four-decade nadir), which puts it among the lowest in the world. In comparison, Europe's benchmark rate is set at 2.5%. This makes investors move out of dollars to buy currencies that pay higher interest, including the euro.

Second, the U.S. trade gap recently topped $500 billion. The larger the trade gap, the more U.S. dollars are being sent abroad, lessening demand for them. Additionally, even with interest rates at record lows, demands for new capital are weak due to a poor economy and restrained customer spending. Essentially, everyone has battened down the hatches, keeping demand for dollars low.

The weak dollar might affect you directly in two ways. If you're traveling abroad, especially to Europe or Japan, you'll find prices aren't what they used to be. A Paris hotel room that cost the equivalent of $139 last spring will set you back about $175 today -- before you take any price hikes into account.

On the other hand, you might own stock in U.S. companies that benefit from a weak dollar. Consider Coca-Cola (NYSE: KO). Two-thirds of its operations are international, and every international sale is converted into dollars when Coke reports results. Today, one euro in revenue will become $1.14 at home, so currency conversions will effectively boost the company's overseas earnings. Fourteen months ago, every euro of sales could only be converted to $0.89 back home.

Other international companies that stand to benefit include the likes of Gillette (NYSE: G), Johnson & Johnson (NYSE: JNJ), and Pfizer (NYSE: PFE). Such benefits are reported as "gains from currency conversions," so it's clear they're not operational improvements -- but the gains are still better than the flipside.

The flipside was occurring in the U.S. three years ago, when the dollar was strong. Then, international sales for U.S. companies were converted downward in value when turned back into dollars. This is exactly the situation that European companies are complaining about now. The strong euro dampens sales results outside of Europe, and one dollar in U.S. sales becomes only about 0.87 euro back home.

As with most things in life, there is both good and bad to having strong currency.

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