smart spending

How weak dollar impacts pocketbook

No. 1: It leads to stagnant wages and increased outsourcing

When dollars are cheap, people overseas can buy more American products, which theoretically helps manufacturers and may even produce jobs here at home.

"It's more expensive for goods to come into the U.S., so more people will buy U.S. goods and indirectly help consumers by providing more job growth," says Thoma.

But there's a slight snag: When the dollar is weak, the relative price of global commodities goes up. It becomes more expensive for U.S. manufacturers to produce anything.

"If you are corporate America, you are squeezed; you have high input costs and very little pricing power at the selling side. These high commodity prices are putting additional pressures on corporate America to accelerate outsourcing, and that is one of the key reasons that real wages haven't gone anywhere," says Axel Merk, president and CIO of Merk Investments.

Merk says a weakened dollar improves quarterly earnings for U.S. multinationals since it improves exports.

But these corporations aren't sharing their increased earnings by hiring domestic employees. In April, The Wall Street Journal reported on recent data from the U.S. Commerce Department showing that multinational companies had trimmed 2.9 million jobs in America through the past decade, while increasing hiring overseas to the tune of 2.4 million jobs.

No. 2: Gas and luxury goods cost more

"The bulk of the world's commodities are priced in U.S. dollars. A drop in value in the U.S. dollar translates to higher prices for commodities," says Mario Singh, director of training and education at FXPRIMUS, a retail foreign exchange brokerage firm.

American consumers may not immediately feel increases in the price of copper or wheat, but they do feel pain at the gas pump. Because almost all oil trading is done in dollars, analysts suspect oil producers like OPEC raise their prices when the dollar falls.

Other imported goods, such as French wines or Italian purses, cost more as well.

"U.S. importers of luxury goods tend to be smaller businesses that don't use more sophisticated financial tools, like hedging or swaps, and also have little negotiation power with their foreign suppliers," says Philip Guarino, owner of Elementi Consulting, an international business consulting firms. "Also, their manufacturers, especially if they are from Europe or Japan, are most likely pricing in euro or yen."

No. 3: Overseas trips are more expensive for Americans

Compared to shredding the purchasing power and income of Americans, pricier overseas jaunts may seem like small potatoes.

But consider that many Americans may have visited Mexico where the dollar still buys a lot of pesos. It's easy to shop in these circumstances. But hop over to France or Germany and suddenly you have to pay a huge premium for nearly everything.

"The strength of the currency is really a reflection of the strength of the economy and the nation. Most importantly it is a reflection of the fact that your currency is a store of value. You can save and that money will buy you something down the road," says Merk.

Today, Americans are working harder and getting less in return. If you've been feeling that a dollar won't go as far as it used to -- you're right, it won't.

Fortunately, a weak dollar is a cyclical phenomenon. It's likely only a matter of time before the dollar strengthens against rival currencies.

 

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