Will Americans Really Win From a Falling Euro?
That's great news if you're planning to travel to Europe in the near future, as you'll be able to get more euros for however many dollars you budget for spending on your trip. But if you're not part of the foreign jet-setter crowd, will you see any real benefit from the strong dollar? Thanks to the global economy, U.S. consumers should start to see some bargains close to home when they shop for imported goods, but a lot depends on exactly what you're looking to buy.
Why a Strong Dollar Should Make Things Cheaper for Americans
Any economics student will tell you that when foreign exchange rates fluctuate, they have an impact on the prices of foreign goods. When the dollar falls, it should make imported goods more expensive for Americans, because it takes more dollars to equal the same amount of foreign currency. Conversely, a strong dollar should make foreign goods cheaper for U.S. shoppers, as it takes fewer dollars to translate into a fixed price in foreign currency.
You can see this effect the most when you're dealing with mass-produced commodity goods. For instance, the U.S. dollar has also climbed dramatically against the Japanese yen, and that has helped bring prices of consumer electronics and other mass-market items down. Similarly, clothing costs have fallen in U.S. dollar terms, and that could help bring prices down for clothes-shoppers in the near future.
Where Theory and Reality Diverge
The problem, though, is that economic theory doesn't always hold true for every type of good from every market. If manufacturers of foreign products have pricing power, they can hold the line or even increase their prices in the U.S. despite the dollar's strength, taking the opportunity to get a big profit boost.
We've already seen that phenomenon happen with many luxury goods. For instance, many foreign winemakers have simply boosted their markup in the U.S. market, taking all the foreign-currency gains for themselves rather than passing them through to U.S. consumers. Similarly, high-end foreign automakers like Porsche have boosted their suggested retail prices on certain vehicles even in the aftermath of a falling euro, looking to maximize their profit margins and trade on their reputation rather than seeking to boost demand by lowering prices.
Moreover, many products that people associate with Europe, Japan and other foreign countries aren't necessarily manufactured there. Several foreign automakers, including Volkswagen (VLKAY), Honda (HMC), and Nissan (NSANY), have manufacturing plants here in the U.S., and because they pay U.S. workers in U.S. dollars, they don't necessarily reap cost savings from a strong dollar.
Could Dollar Strength Actually Hurt Investors?
Meanwhile, the same economic factors that help foreign companies in the U.S. hurt U.S. companies in foreign markets. To maintain their profit levels in U.S. dollars, multinational corporations have to raise their prices in foreign-currency terms. Those price increases make U.S. products less attractive to foreign buyers, hurting revenue at U.S. manufacturing companies and often sending their share prices downward. So far, the strength in the U.S. economy has largely offset weakness abroad, but many major companies have seen their profits take a big hit from the strong dollar.
Similarly, businesses that rely on the tourist trade in the U.S. could take a hit. Foreign travelers coming to the U.S. get fewer dollars when they exchange their foreign currency, and that in turn could rein in their spending plans. Those businesses could also suffer from a greater number of U.S. tourists deciding to travel abroad if they can afford to do so rather than staying close to home.
In the end, currency markets tend to fluctuate back and forth over the years, making long-term cycles that cancel each other out in the long run. Still, as markets adjust to rapidly changing conditions in foreign exchange, consumers should be on the lookout to see if the imported goods they like will finally go on a long-awaited sale.
Motley Fool contributor Dan Caplinger had his first trip to Europe planned long before the euro started falling. You can follow him on Twitter @DanCaplinger or on Google Plus. Check out our free report on one great stock to buy for 2015 and beyond.