Today’s cut rate from the Fed has economists expecting that the already-weak dollar will fall even further. That’s after the greenback hit a new record low against the euro early Wednesday, breaking the record it set Monday following announcements of a plunge in consumer confidence — i.e., a measurement of Americans’ optimism about the economy, based on surveys.
What does that mean for your wallet? Simply put, the weaker the dollar, the more you pay for imported goods such as that favorite bottle of Château Lafite-Rothschild from France or that Mercedes-Benz S-Class from Germany. “Currency fluctuations immediately affect prices,” says Michael Woolfolk, senior currency strategist for The Bank of New York Mellon.
But that change is more on manufacturers’ bottom line than price tags, he says. Just how much, and how quickly prices fluctuate depends on several market factors. Where the goods come from will have a significant impact. You can expect to see more of a price hike on products from Canada, Australia and Europe than those from Asia. That’s because many Asian currencies — including the Chinese yuan and the Hong Kong dollar — are pegged at or near the U.S. dollar, meaning the values of these currencies tend to move in tandem.
Market competition plays a role, too. Based on sale projections from the National Retail Federation, retailers are facing their worst holiday season in five years. Yet most of them would rather keep prices low and take on any extra cost themselves than risk losing customers at the cash register. “[There will be] none of these across-the-board price increases,” says Milton Pedraza, president of Luxury Institute LLC, a market research firm. “It’s going to be very surgical, with most increases coming after the new year.”
If there’s good news, it’s that the dollar’s recent decline represents a relatively small slide in a six-year plunge, which has seen its value decline by about 30% against the Fed’s trade-weighted index of major world currencies. “The dollar has been weakening against the major currencies for several years, so the bulk of price changes have already taken place,” says Tony Gao, assistant professor of marketing at Northeastern University. “The question is really how much further.”
Big-ticket items such as cars, jewelry and wine are traditionally hit hard when the dollar weakens. Here’s what to expect:
The double whammy of a weak dollar and high consumer demand world-wide has sent prices for raw jewelry materials — most notably diamonds and gold — skyrocketing.
The issue with gold is twofold. Typically, when the dollar is beaten down, investors flock to gold as a safe-haven investment. That’s definitely been the case in recent weeks. (Gold hit a 28-year high Wednesday as the dollar flirted with record lows.) On top of that, gold is priced in U.S. dollars, which means foreign buyers can buy it at a discount to U.S. consumers as the dollar continues to fall, which drives up demand and therefore prices.
And while some jewelers set prices by what they paid at the time they bought these precious metals and gems, others continuously jack up prices to reflect the going rate. That makes it crucial for consumers to comparison shop, warns Renée Newman, author of “The Jewelry Handbook.” “It’s no longer a given that a more expensive piece is better,” she says. You’ll need to research — and then compare — those factors that affect a piece’s quality and desirability. An independent appraisal couldn’t hurt either if you’re eyeing a particularly expensive piece. (For tips to help you separate the real sparklers, click here and here.)
Look for the biggest increases in machine-made jewelry. “There, you’re paying mostly for the metal and gems,” she says. “If it’s a custom-made, one-of-a-kind piece, you’re probably paying more for the craftsmanship.”
There are a few bargains to be had at the jewelry counter. Because diamond prices are directly pegged to the U.S. dollar, prices of average-quality stones should be heading lower, says Martin Rapaport, founder of the Rapaport Diamond Report. “I don’t think the weaker dollar has come in time to reduce holiday prices at Wal-Mart,” he jokes, “but you should certainly go out and look now.” That’s not the case for high-end stones, however. If you’re looking for an engagement ring or other jewelry focusing on one or two flawless stones, expect to pay a premium.
Go ahead. Raise your wine glass in celebration. Because the holiday season is when the bulk of wine is purchased, it’s unlikely that you’ll see price changes on any but the most expensive and desirable bottles, says Natalie MacLean, editor of Nat Decants, a wine education site. “With higher demand, ignoring the increase would be a clever marketing strategy,” she says. Just don’t expect bargains on everything. With prices on U.S. wines already dropping abroad, it’s unlikely you’ll see many holiday-related price cuts at home. (Champagne is always a particularly good deal this time of year. For tips on getting the most value on a bottle, click here.)
More substantial changes will show up next fall, when the wines crafted this year are released on the market. But it’s tough to anticipate how much of the change would be a result of the declining dollar as opposed to, say, a particular vintner or region producing a very good year, says MacLean. “The vintage factor is always a large part of the price,” she notes.
If you’re looking to buy a car in the next year, you’re more or less in luck. Auto prices aren’t expected to ratchet up much more than the traditional 1% to 2% between model years. Heated competition among auto makers makes currency fluctuations less relevant — European manufacturers need to offset price increases to keep U.S. consumers interested in buying their cars over Detroit’s, says Jack Nerad, executive editorial director for Kelley Blue Book. It doesn’t hurt that brand rivalries span continents. Germany’s BMW needs to keep prices paced with Japan’s Lexus, despite the latter country’s more stable relationship to the U.S. dollar.
If there are any increases due to the weak dollar, you can expect them to kick in slowly over the course of the next year as manufacturers replace diminished imported stock with newly built, higher-cost cars. Aiding the snail’s pace are the foreign auto makers’ North American plants, whose products are considered domestic goods. (More than half of U.S. Volkswagen models, for example, are built at its Puebla, Mexico, plant, while BMW recently announced plans to increase production at its Spartanburg, S.C., location.)
Looking at the whole picture, next year might actually make for a better year to buy an import, says Jesse Toprak, executive director of industry analysis for Edmunds.com. As the U.S. dollar has declined, European auto makers have offered bigger rebates. “If you look at the prices, they’re not going up,” he says. “But the incentive spending is going up dramatically.” In 2003, an auto maker could offer $2,000 cash back at a cost of €2,040 to its bottom line. Today, spending that same sum enables them to offer more than $2,900 in rebates to U.S. customers.
Note: This article was also published in Smart Money Magazine.