Travel abroad is more expensive, but your overseas investments may benefit.
Diane Swonk, founder of DS Economics, is past president of the National Association for Business Economics and a member of the Council on Foreign Relations. Her firm works with public- and private-sector organizations to identify and hedge against economic risk.
The dollar has fallen about 9% against major foreign currencies this year. Why is the greenback losing value? It’s a combination of factors. Hopes for tax reform and pro-growth economic policies have dissipated since the election, and the Federal Reserve doesn’t see as much urgency to raise interest rates rapidly. Plus, economies in Europe and Japan are showing more strength, pushing up their currencies relative to the buck.
How will this impact U.S. consumers? We could see higher prices for Japanese cars and some luxury goods from Europe. But many companies hedge their exposure to the dollar to lessen the impact of currency changes. Online competition is also making it hard for companies to raise prices.
Will U.S. companies benefit from a weaker dollar? Domestic manufacturers should be able to sell more goods abroad. But a bigger issue is the impact of tariffs and the potential for trade wars. Building a house now costs an extra $1,700 because of tariffs recently imposed on Canadian lumber. The Trump administration wants to narrow the trade deficit. But if we get into a trade war, it would result in higher costs for all sorts of imported goods and raw materials. That will raise prices for consumers and businesses much more than a weaker dollar.
Do you think the dollar will lose more value against major currencies such as the euro? We think it will fall another 2% against a basket of major currencies through the end of 2017 and then stabilize in 2018. The dollar remains the world’s primary reserve currency: Foreign governments hold trillions of dollars in reserves (mostly Treasury securities) because it’s still the safest and most secure form of money.
Have you felt the impact of a weaker dollar personally? Yes. I was in Europe this summer, and our hotel bills got more expensive as the dollar fell during the trip. If you are booking a trip abroad, some hotels allow you to pay in dollars in advance. There are no guarantees, but locking in a rate at least buys you the reassurance of knowing up front what it will cost.