The recent weakness in the euro has led to benefits for American consumers, as the U.S. dollar can buy significantly more euros than just a few months ago. This makes travel to Europe cheaper, may lead to lower prices for items in America that are imported from Europe and even helps lower rates on mortgages in the U.S. Things can change quickly in the foreign exchange market, so consumers might want to act quickly to take advantage of the falling euro. (Moving from equities to currencies requires you to adjust how you interpret quotes, margin, spreads and rollovers. Learn more; read A Primer On The Forex Market.)
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Not too long ago, the U.S. dollar was the butt of jokes around the world as higher deficit spending used to fight the recession and financial crisis caused investors to favor currencies of nations that seemed in better financial condition. The euro was one of the main beneficiaries of this trend, as it gained strength against the dollar over a multi-year period.
Pundits even talked openly about replacing the dollar as the world's reserve currency and replacing it with the euro or a basket of other currencies. Rumors swept the market that some members of the Organization of Petroleum Exporting Nations (OPEC) were considering not accepting dollars for oil sales any longer due to the weakening currency. (OPEC's decisions can influence oil prices, but there is a limit to its power. Learn more in Meet OPEC, Manager Of Oil Wealth.)
However, earlier in 2010, the market turned its attention toward the finances of many European nations, as Greece started to have trouble accessing the capital markets. Market worries about the European sovereign debt then spread to other nations, including Spain, Portugal, Ireland and Italy. Over the last six months, the euro has declined in value as much as 20% versus the dollar, with a euro worth 1.2287 dollars.
The most obvious benefit is for travel by Americans to Europe. Let's say that two college roommates were setting up a trip to the continent in the summer, and started planning in early 2010. One roommate saw the plunging dollar and in December 2009, exchanged $4,000 into euros at the exchange rate back then of 66 cents per euro. He netted approximately 2,640 euros and felt pretty good about the trip. His friend was a little lazier and waited until last week. His $4,000 nest egg was converted at the current rate of 81 cents per euro, yielding approximately 3,200 euros, about 600 euros more than his buddy.
The effect of a falling euro on the prices that Americans pay for European goods is a little more complex. Standard economic theory holds that when a nation's currency depreciates, it makes goods cheaper on the international market and helps exports. While this is true, some mitigating factors may prevent a flow through of all the benefits of a falling euro against the dollar.
Middlemen and retailers in the U.S. may capture some of the currency benefit for themselves and keep prices the same, hoping perhaps that U.S. consumers don't pay attention to daily currency fluctuations.
Many products also use petroleum-based raw material inputs somewhere in the supply chain. Since oil is still denominated in dollars, as the euro falls, oil will become more expensive to these manufacturers and might cut profit margins. Transportation costs may also rise with the price of oil. This may lead European companies to raise prices to cover higher costs, erasing or limiting any benefits of the currency change for Americans.
Even with these complexities, consumers have already started to notice that the prices of some European goods have fallen, with local newspapers reporting price declines for cheese, wine and other consumables.
The falling euro and panic over the European sovereign debt crisis also lowers interest rates in the U.S., helping Americans looking for a mortgage to buy a home. As global capital shifts into dollar-denominated assets, it is invested in the most liquid financial instruments, typically U.S. government obligations. This high demand pushes prices up and lowers interest rates, helping both new buyers and Americans with adjustable-rate mortgages that reset based on Treasury rates.
The continuing European sovereign debt crisis has led to schadenfreude for the U.S., as the conventional wisdom about the "pathetic" U.S. dollar appears to be premature. American consumers are also seeing a benefit as the value of the euro versus the U.S. dollar seems to hit a new low every day, making travel and imported goods cheaper as well.
Catch up on the latest financial news; read Water Cooler Finance: Shocking Court Rulings, Sinking Markets.