U.S. consumers may soon begin to feel some pain from the dollar’s downturn, although the recent slide in the world’s main reserve currency isn’t bad news for everyone in America.
The greenback has dropped 8 percent in 2017 and is on track for its first annual decline in five years. It weakened after U.S. tax changes aimed at spurring growth were slow to materialize and lackluster inflation weighed on the longer-term trajectory for interest rates even as the Federal Reserve tightened policy. A more upbeat picture in other parts of the world such as Europe has also weighed on the U.S. currency, and many analysts predict further weakness ahead.
For households, that means the earlier benefits of currency strength are likely to dissipate. On the flipside, local businesses could gain, especially if they’re exporters, and that could boost the economy as a whole.
Here are some of the ways that a softer dollar might have an impact:
- A boost for exports: At the turn of last year, the Federal Reserve’s trade-weighted dollar index showed that the U.S. currency had appreciated 26 percent since mid-2014. It’s little wonder then that President Donald Trump, even before he took office, spoke about the strong dollar “killing” the ability of U.S. manufacturers to compete globally. The trade-weighted greenback has since fallen more than 6 percent, making it less expensive for overseas consumers to buy U.S. goods — and rendering local products more appealing to domestic buyers.
Credit Agricole analyst Vassili Serebriakov says that American manufacturers may be feeling the love for months to come, given that the dollar is likely to stay in the doldrums. “We think it’s a slow downtrend in the dollar, so U.S. exporters can probably look forward to benefiting,” he said.
- Costlier imports: U.S. shoppers might not be so cheery. While European consumers may be loading up on American imports, overseas goods have become more costly for people in the U.S. to buy.
“Consumer purchasing power will be lower, so they will feel a slight pinch,” said Minh Trang, senior foreign-exchange trader at Silicon Valley Bank in Santa Clara, California.
One saving grace for U.S. buyers though is the fact that America’s economy is more domestically focused than many other nations’ — although that factor also limits the fillip that a weaker currency provides for businesses.
Add to that tax cuts and the possibility of rising wages, and the sting may not be so bad after all. While higher import prices are a drag for consumers, “the overall strength of the economy negates that,” according to Serebriakov.
- Foreign vacations: If you’re an American who is actually going abroad to Europe or elsewhere, there’s no denying that your spending power will be reduced in many other locales.
“A weaker dollar will encourage home tourism and discourage consumers from vacationing abroad,” said Sireen Harajli, a foreign-exchange strategist at Mizuho Bank Ltd. in New York.
For a time, the dollar’s strength against the euro made Western Europe an attractive destination, according to Erik Nelson, a currency strategist at Wells Fargo. But for those wanting to travel abroad now, the weakening greenback is clearly a negative, he says.
The dollar is predicted to decline against 12 of its 16 major peers next year, so vacationers may end up being more selective when it comes to international destinations or consider local options instead.
Conversely, the weaker dollar may attract foreign tourists to the U.S.
“We will likely see a surge in tourism in the U.S. similar to what we saw during the financial crisis when the dollar weakened as the Fed began to aggressively ease monetary policy,” Mizuho’s Harajli said. “Fifth Avenue all of a sudden became full of European and Asian tourists looking to shop as their purchasing power increased,” she said.
- Higher gas prices: Unfortunately, any plans locals might have for a U.S. road trip, and other household expenditures, could be curtailed by more expensive auto fuel.
Many natural resources including oil, metals and agricultural commodities are denominated in dollars, so when the currency declines, prices for such materials typically rise. West Texas Intermediate crude has climbed around 11 percent this year, while gasoline futures are up about 8 percent.
“ Gas prices in particular are incredibly relevant to most American households,” Wells Fargo’s Erik Nelson said. “As the dollar depreciates more consistently and more significantly, I think you’ll see commodity prices, in dollar terms, tend to rise.”
If that filters through to prices at the pump, the benefits that consumers have enjoyed from cheaper fuel will erode, he said.