Understand Your Finances
5 ways the falling dollar affects your wallet
The following article is part of Money Matters, a Chase series that unpacks economic and financial trends, and issues.
This may be the year to see sights of London rather than Paris, sample California wines instead of French varietals, and give Detroit's cars a second look.
That's because the dollar has fallen sharply against many other currencies in the first half of the year, causing prices abroad and for imported goods to rise.
The dollar has fallen 10 percent—to 88 in August from 96.05 in January—according to the Federal Reserve's dollar index, which tracks a basket of currencies. It fell about 15 percent compared to the euro. The dollar index goes up when the U.S. dollar gains strength, or value, when compared to other currencies.
What's dragging down the dollar?
It's a combination of European economies powering ahead and unexpectedly low U.S. inflation, says Roger Hallam of JPMorgan Chase. That, in turn, dampened expectations for an interest-rate increase here, said the currency chief investment officer of the Global Fixed Income, Currency & Commodities group at JPMorgan Chase.
So what does this mean for consumers? Here are five ways the weakened dollar may affect your wallet.
1. Trips to Europe can be more expensive
It costs more to vacation in Europe than it did just a few years ago. Sure, airfares have remained low because they are listed in dollars for U.S. travelers, even by foreign airlines. But everything else will cost more, from hotels to restaurant meals to sightseeing.
So be smart and consider alternate destinations, such as London because the British pound is up only 4 percent this. Or Bangkok, where the baht is down 6 percent against the U.S. greenback.
2. Imported clothes and cars will be more expensive
That's especially true of luxury goods such as leather handbags and shoes made by small firms. They are more vulnerable to swings in currency prices, and tend to pass on price increases to their customers.
You may also see price increases in big-ticket items such as luxury cars. That may be muted for some models because a number of foreign car companies opened U.S. plants, reducing the impact of a dollar decline.
Competition also will reduce some impacts. In the last dollar selloff, Japanese car companies gained market share from their German counterparts when they raised prices. So, this time, German carmakers may absorb currency losses to keep their prices stay relatively stable.
Also, don't expect a sustained spike in inflation despite some price increases, says Jim Glassman, chief economist for Commercial Banking at JPMorgan Chase. Recent movements in the dollar "have brought import inflation back into alignment with domestic inflation trends," Glassman wrote in an August paper titled "How Inflation Responds to a Declining Dollar."
"Consumers have seen little impact on retail prices, perhaps a sign that importers are taking steps to blunt the falling dollar's impact," he wrote.
3. Demand for US commodities will increase
While the price of finished products may remain fairly stable, the prices of commodities such as wheat, corn and cotton, which are denominated in dollars, are impacted by currency swings, the Federal Reserve says.
When the dollar is low, demand for these commodities increases abroad. Now that the dollar is on a downswing, farmers can expect increased demand abroad for their agricultural products. But that competition may drive up food prices at the supermarket.
On the other hand, prices for commodities such as copper are down, so products that utilize these may be cheaper.
4. Job cuts may arise
The impact of U.S. jobs isn't as positive. Theoretically, a weaker dollar helps U.S. companies because the prices of U.S. exports declines on world markets. But the U.S. doesn't make many cheap consumer goods anymore, so the falling dollar may not create many more jobs.
In fact, the opposite may be true: because of higher commodity prices, U.S. manufacturers are squeezed between higher input costs and competition from foreign firms. In the past, U.S. companies have responded by cutting jobs at domestic factories and outsourcing more jobs overseas.
5. Investment growth typically positive
If you have stock-market investments—including brokerage accounts and retirement accounts such as 401(k)s and IRAs—you may have seen or will see a bounce in their value. A falling dollar boosts earnings at U.S. multinational companies that get the majority of their sales overseas.
In addition, a lower dollar boosts exports and this often increases earnings and dividends, pushing up stock prices.
Charles Wallace is a Chase News contributor. His work has appeared in Time, Fortune, and Money magazines, among other media outlets.