Drawing Attention: A Weak Dollar

A weak dollar could draw more attention in the coming year.

The dollar’s slide against other major currencies in recent years has helped drive up prices for energy and food and in turn contributed to the economic hardship some consumers face. A further drop in the dollar in 2008 could spell more trouble.

Dave Minucci who works at JPMorgan Chase says a recent home heating bill was $120 higher than at the same time last year due to higher energy prices and a weaker dollar. He sees what many Americans may not realize: With commodities from oil to natural gas to grain to meat priced in dollars and becoming more expensive as the greenback falls, consumers have to take more out of their wallets to simply buy the same amount of goods. And a lower dollar can also raise the cost of imported goods.

The dollar has fallen because of concerns among investors worldwide about the U.S. economy, especially since a cascade of home mortgages has soured in the past year. And the dollar’s slide itself has further eroded confidence among some investors who question whether currencies like the euro will be better able to hold their value in the coming years.

Overall inflation is running at 5.6%, largely due to sharply higher energy costs as oil approached $100 a barrel. But the costs of food, clothes and medical care are have also increased.

Minucci thinks people are too quick to blow off concerns about a weak dollar as irrelevant to their daily lives. But considering the numbers can be startling. The dollar has fallen 11% against the euro since the start of 2007 and 24% against the 13-nation currency since the beginning of 2006.

Few Negatives

  • Since the start of 2007, milk prices are up 23%, while the cost of a dozen eggs has risen more than 40%.
  • Energy and commodity prices become expensive. Imports become that much more expensive.
  • US Treasuries become less attractive.
  • Traveling abroad might not be as appealing for many American tourists either.
  • Investors worldwide have to sort out concerns about the U.S. housing market as well as get a better sense of how many now shaky mortgages will go bad and hurt bank’s finances before they’ll be eager to snap up the dollar.

Few Positives

  • Exports have risen as goods made in America are suddenly cheaper in many places outside the country. Plus, with stronger foreign currencies, both investors and shoppers from outside the U.S. see “sale” signs across much of America — on everything from sweaters and iPods to businesses and real estate.
  • Foreigners are coming here and buying retail items such as clothes and jewelry and technology.
  • Companies with international presence see their earnings boost.

Recommendation: Go long on companies with strong international presence, emerging market funds, commodity sector and energy sector.