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The dollar's direct effect
Common questions about what a weak dollar means for travel, spending, and investing.
May 20, 2003: 4:10 PM EDT
By Sarah Max, CNN/Money Staff Writer

NEW YORK (CNN/Money) - The once-mighty U.S. dollar is down and still falling.

On Tuesday, the greenback was trading near an all-time low against the euro and worth almost 29 percent less than it was at its highest point in October of 2000.

The European Union isn't the only place where the dollar is losing its luster. It has fallen against the Japanese yen, the British pound, the Canadian dollar, and other foreign currencies. (See more.)

Here are the questions to ask as the dollar continues its slide.

I was planning a trip to Europe. Is it too expensive?

If you're traveling to Europe any time soon, you will most certainly be affected by the weaker dollar.

In countries where the euro has replaced local currencies -- Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain -- American tourists can expect to pay 20 percent more for hotels, meals and museums than they did last May.

One way to understand how much the U.S. dollar is worth in another country is to look at local prices and then consider the exchange rate. The Economist does this using the price of McDonald's (MCD: Research, Estimates) Big Mac, which cost an average of $2.71 in the United States as of late April.

Based on the latest Big Mac index, this burger will cost Americans $2.97 in the European Union, which is less than 10 percent more than you'd pay here. Yet, in Switzerland, a Big Mac will cost you the equivalent of $4.52.

Then again, in Canada, Mexico, South America and much of Asia, Americans still have a great deal of purchasing power. In Thailand, for example, you can feast on two all-beef patties for just $1.38.

What effect on price of Volvos, Nintendo, and Bordeaux?

Ten years ago, fear that the dollar would decline more might have been reason to run out and buy the imported car you'd had your eye on, but this is no longer the case.

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According to Joe Cashen, director of pricing strategy for CarsDirect.com, foreign auto makers have gone to great lengths to make sure that currency fluctuations don't affect prices in U.S. markets.

"The majority of Asian cars sold in the U.S. are actually made in the U.S." he said, noting that BMW makes some of its models in the United States, while Volkswagen has a large production plant in Mexico. Volvo, meanwhile, is owned by Ford (F: Research, Estimates), GM (GM: Research, Estimates) makes Saabs, and Mercedes is the German stepchild of DaimlerChrysler (DCX: Research, Estimates).

The same can be said for most other imported consumer goods, particularly electronics, where competition is constantly pushing down prices.

"A manufacturer cannot charge more tomorrow for the same digital camera he's selling today, no matter what the currencies are doing. It would have a total evaporation of sales," said William Valentine, president of Valentine Ventures, a firm that manages investments for high-net worth individuals.

Foreign firms typically absorb any depreciation in the dollar by taking a lower profit margin in lieu of having to raise prices for U.S. customers, said David Ingram, director of international economics for economy.com. "It's not the Kmart and Wal-Mart shoppers who are being affected," he said.

Such is also the case with wine. "The weakening dollar hasn't affected wine prices at all," said Peter Ekman, president and CEO of Wine.com, noting that foreign vintners have flooded the market in recent years and created a wine glut. "Unless you are a screaming eagle with very limited production, if you increase prices you'll kill yourself."

This is not to say that all goods are immune to currency fluctuations. Indeed, you may be paying a little more for foi gras, Belgium chocolate or other specialty goods than you did a year ago.

My broker says to buy foreign stocks. Should I?

"Right idea, wrong reason," said Valentine.

In theory, American investors can protect themselves from a weakening dollar by investing in foreign markets where the currencies are strengthening. If the dollar continues to fall, these investments will be worth more when converted back into dollars.

What's happening with the dollar is a good lesson for why it's smart to allocate a percentage of your portfolio to international investments. But that doesn't mean you should run out and invest in a foreign mutual fund simply because the dollar is weakening.

"Over the long term, currency fluctuations tend to balance themselves out," said Gregg Wolper, senior fund analyst for Morningstar.  Top of page




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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.