If you have watched any news showsover the past year, you have likelyheard that the US dollar has fallen invalue against many foreign currencies.For most people, this amounts to nothingmore than a sound bite of meaninglessinformation that has no impact ontheir lives. Or does it? A fluctuating dollarcan impact your pocketbook in a varietyof ways, so it is important to have abasic understanding of the effect of currencyfluctuations.
In Federal Reserve Chairman AlanGreenspan's recent testimony beforeCongress, he noted, "Against a broad basketof currencies of our trading partners,the foreign exchange value of the US dollarhas declined about 13% from its peakin early 2002." In 2003, the dollar'sexchange value dropped 20% against theeuro. Our dollar lost 34% against theAustralian dollar and 10% against theJapanese yen. Some experts expect thistrend to continue throughout 2004, whileothers expect the US dollar to begin torise against foreign currencies.
When the value of our dollar declinescompared to a foreign currency, you arepotentially impacted in two importantways: spending and investing.
If you plan to travel abroad, it will costyou more to do so. This is because yourmoney has less value based on currencyexchange rates. One strategy to consider isto postpone foreign travel until the dollarstrengthens against foreign currency. Analternative is to choose to travel to a countryin which the dollar has been lessimpacted. For example, you may want toavoid a trip to Australia since our currencydecline there has been very sharp. Thecheaper dollar will also increase the cost offoreign goods sold in America. Whetheryou are buying a foreign automobile orelectronics, you will want to do some carefulprice shopping. Some foreign companieshave domestic operations, such as theMercedes plant located in Alabama, andothers are absorbing some of the currencyincreases to remain competitive.
From a domestic investing perspective,the declining US dollar is positivefor domestic companies that have substantialforeign sales, since our productswill be more attractively priced comparedwith similar foreign-made goods.To take advantage of this, you may wantto consider investments in US companiesthat are large exporters. You should notethat domestic technology companies areamong our largest export companies. Ifyou are investing in foreign companies,say using a mutual fund, you will want topay special attention. If the US dollarbegins to rise against foreign currencies,international mutual funds that do nothedge against currency fluctuations willexperience downward price pressure.Your best defense is to make sure yourinternational fund manager has thecapability to use currency hedging techniquesto neutralize this problem.
Dramatic changes in the value of UScurrency can have a direct impact onyour pocketbook. By paying attention tothis sound bite, you will become asmarter shopper, traveler, and investor.
Stewart H. Welch III, CFPÂ®,AEP, founder of the WelchGroup, has been rated one ofthe nation's top financial advisorsby Money and Worth. Hewelcomes questions or commentsfrom readers at 800-709-7100 orwww.welchgroup.com. Reprinted with permissionfrom the Birmingham Post Herald.