The strength of the US Dollar, or rather the lack there of, is certainly not a new story, but rather one that has been gather steam for quite some time. I can remember when I bought my first Euro while on deployment in the Mediterranean in late 2002.
The Dollar and the Euro were at parity. Nearly 1 to 1. Even Steven.
That’s a far cry from today’s exchange rate which is approximately $1.57 per Euro (at the time of this writing). That’s a total return of 57%. Not too shabby in my book.
In the Spring of 2003, during that same deployment, we made a stop in England before coming home to the US. At that time you had to pay an average of $1.55 for each British Pound. Today’s rate is $1.99. That’s a 28% return on your money in 5 years. I’ve got investments doing better than this, but even so, you would have made money investing in the Pound.
In hindsight, I should have invested in some foreign currency (the Euro). Instead, during those port calls I invested in foreign wheat, barley and hops…in a liquid state. 
So how does the dollar’s performance affect me? On a daily basis gut check, I have to say, not much that I actually notice. I mean, I know that everything that is imported (and what isn’t these days) should begin to increase in cost, but if it has recently, it’s lost on me. I guess I need to check with my Money Spender.
Warning, I’m heading off on a tangent.
The Dollar’s poor performance has certainly been part of the run up in the cost of a barrel of oil recently, but my gas prices haven’t changed appreciably since all the Dollar hype has hit the media. The price of oil is traded in Dollars, if you weren’t aware, so a decreasing Dollar can mean losses for foreign oil producers if the Dollar cost of that barrel does not rise.
Let’s use an example to illustrate. Assume that the Dollar and the Euro are at parity and that a barrel of oil costs $1 (ie. 1 EUR). If we hold the price of that barrel constant at $1, and then the value of that Dollar drops like it has to today’s exchange rate, that same $1 barrel of oil is only worth 0.63 EUR. Â That’s a hefty drop in value.
Now if we were foreign oil producers, what’s more important to us in our daily life, Dollars or a Foreign currency? That’s right…probably the Foreign currency. So what do you want to have happen if you’re that foreign producer who is trying to preserve his wealth with a commodity that trades in a falling currency? You want to have the price of that barrel cost more in US Dollars, so you can at a minimum preserve your wealth.
So reverse the example now. Let’s stick with Euro for our foreign currency and hold the value of that barrel of oil constant at 1 EUR. Just to keep the Euro value stable at 1 EUR would require increasing the Dollar cost from $1 to $1.57 per barrel.
I’m not claiming that the price of this commodity solely hinges on the weakness of the Dollar, but I believe it is part of the equation that is driving oil prices.
Ok, I’m back on track now.
So I haven’t noticed much price change with all the Dollar hype. I just checked with the Money Spender and she feels the same way. But my European colleagues at NATO talk about it all the time. When I’m checking stocks during my lunch, they’re checking the currencies. If anything, I feel a little embarrassed about the whole thing. Great big mighty USA, itty bitty Dollar. Not like I had much of a hand in causing the declining value, but my countrymen did.
The Europeans love it. Their friends and family love it. The US is like a K-mart with a ”blue light special” on EVERYTHING! For those of you under 30 who have never heard of K-Mart and are probably wondering what a ”blue light special” is/was, go ask your parents.
They’ve told me stories about their friends and family who come over here on travel vacations, buy an extra suit case (after they get here of course because its
cheaper), and then load it up with as much stuff as will fit. I mean we’re talking 5-10 iPods, several cameras, tons of clothes, laptops, you name it. It’s all a bargain for them and the suit case full of Dollars they get in return for a wallet full of Euros.
I know, I know, I should be happy they are dumping money into our economy. I’m sure I’m just jealous that they get to come over and paint the town red. I want to do some painting too.
My British friend is laughing at all of us (including the Euro spenders). He just bought an iMac at 50% off with his currency.
So what do my fellow countrymen think of this concern? I was listening to CNBC today on my way to work and heard one of the early morning guests state he “is for a strong Dollar, just not right now.” This guy should be a politician.
With as much control as the Fed and the Treasury seem to think they have (and probably do), I’m certain they could prop up the dollar a bit. If for no other reason, how about for my pride each day at work?
What are your thoughts on the Dollar?
- Jeff
Learn to manage money and mind your own business.
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