Whether you're a savvy follower of currencies, or the mere thought of comparing dollars, euros and yen gets your head spinning, changes in the relative value of money around the world affect nearly all of us, wherever we live and whatever kind of money we spend. Today we'll look at why the euro has been tumbling, and how you might notice the fall in your everyday life, whether you're a global investor, a traveler or just an opportunistic shopper. (Check out When And Why Did The Euro Make Its Debut As A Currency? for a quick background on the euro.)
In Pictures: 9 Tricks Of The Successful Forex Trader
The Euro Sickness
Making big news lately has been the steep and steady decline of the euro, the single currency used by 16 European nations in what is termed the eurozone. So far this year the euro has fallen from a value of 1.50 euro to US1 to 1.28 euro to US1, a drop of 15%. Triggering this move has been an all-out crisis in Greece, where bankruptcy looms amidst rioting citizens and an entire continent unsure of how to handle this phase of the "single currency, many nations" experiment. (To learn more, check out EU Economics? It's All Greek To Me!)
While an agreement has been reached to provide emergency loans to Greece from the European Central Bank and Greece's healthier neighbors, fears over the euro don't end there. Spain and Portugal could become Greece-like situations later this year. And several other countries aren't meeting the minimum standards set up by the European Central Bank to be part of the eurozone in the first place.
So the euro sickness isn't contained, and good medicine is in short supply given that the global economy is still in the baby steps of recovery. Some nations, like Germany, are relatively healthy, but should they drag themselves down to help their neighbors? It's leading some investors to wonder if the euro will even survive as a standalone currency, which only precipitates more down sliding in the euro's worth versus other currencies. (For more, see Greece: The Worst-Case Scenario.)
Falling Euro's Impact for Consumers
Goods that are produced in eurozone nations and exported to the U.S. will presumably cost less to American shoppers. So a designer suit that would have cost $1,000 in December may be up to 20% cheaper now, assuming that the producer's costs have remained the same.
And if you're in the market for a European car, this could be your lucky year. A 15-20% discount on a BMW or Volkswagen could add up to big savings. For those who are lighter in wallet, you can simply splurge on a nice bottle of wine or bubbly to take advantage of your dollar's increased purchasing power.
Falling Euro's Impact for Travelers
Has a trip to Europe been on your wish list for a while now? This might be the year to indulge yourself, because your dollars will go much farther than 2008 or 2009. Everything from hotels to dinners to indulgent shopping trips will be cheaper.
Many European retailers are hip to the game and have been posting the dollar-equivalent prices for goods in their stores to appeal to American shoppers. Because currency moves can happen fast (even mid-vacation), consider converting a small amount of cash when you arrive, then using a major credit card when you can during the trip. Vendors like Visa and MasterCard typically provide real-time conversions at the point of sale, so if the euro continues to fall while you're there, you can take advantage right away.
Impact for Investors
Modest currency fluctuations are a normal and constant occurrence. But when a major currency's fall is based on real fears about the health of an entire continent, bigger issues come into play for all investors. The falling euro has a negative impact on many global companies; after all we are in the evermore globally-based economy. The stock indexes in Greece, Spain and Portugal have been in a freefall for months now. Places like U.K. have been holding up well so far, but a dragging currency can take down stocks and bonds in a heartbeat.
European investors, their purchasing power plummeting, are buying less of everything - fewer stocks, fewer commodities and fewer bonds. This will drag down the stock of any U.S. company that does business in Europe, and can strike fear in global stock indexes, as evidenced by the 990 point drop in the Dow late on Thursday.
If you invest in individual stocks, you can likely find out how the euro impacts your favorite company by doing some quick research into the most recent quarterly report. Big companies tend to provide investors with some commentary on how major currency trends could impact the bottom line.
And if you use funds to access the market, chances are that the diversification you get will outweigh any exposure to specific companies or world regions that could see further slippage in the months ahead. This goes for euro-denominated bonds as well as foreign stocks; both could see further declines if the euro mess continues.
Global Economy, Global Problem
If the events of the past three years have taught us anything, it's that problems in one area of the world can't be contained. Financial contagion is real. What started as a relatively small problem in subprime mortgages quickly radiated around the whole world in a major recession. So even though Greece is a tiny economy in nominal terms, we need to remember that we are all married; for better or worse, what affects part of us will inevitably affect the whole. (For more, see Government Bailouts Around The World.)
Feeling uninformed? Check out the financial news highlights in Water Cooler Finance: Greece Is Burning And Buffett's Under Fire.