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The Falling Euro’s Effect on US Prices

It is feasible that the euro and the dollar will hold equivalent values in the near future.  This is the result of the euro’s falling value and surging dollar.  In July, the euro was worth $1.37 – today it is worth $1.05 (the lowest it has been in more than a decade).  The European Central Bank recently initiated its last round of quantitative easing, which will further add euros to the market and induce traders to dump euros in favor of other currencies including the dollar.  Greece’s economic conundrum further depreciates the euro’s worth.  Conversely, speculation that the US will increase interest rates inspires foreign capital which will add to the dollar’s value.

Theoretically, a falling euro bears benefits for US consumers.  European imports become relatively cheaper.  Journalist Dan Caplinger has noted this effect in relation to Japanese and US currencies: as the yen has become relatively weaker, the price of electronic goods and mass-market items have decreased in the US.  However, this phenomenon doesn’t hold true for all markets; companies producing luxury goods may maintain their prices – or even increase them in order to yield higher profits.  While the euro has fallen by 22.4% since July, the average price of European goods in the US will not fall by the same magnitude.

In fact, it is possible that a relatively stronger dollar will hurt the US.  American companies located in foreign countries will look less attractive to foreign markets, since prices must be increased in order to maintain profit levels.  International tourists also may be deterred by the dollar’s strength, hurting tourist-driven markets.  When asked if any of this bears serious long-term implications, Dan Caplinger posits that currency markets always fluctuate back and forth, meaning that the differences effectively cancel each other out.  Do you think these fluctuations should/can be written off as easily as Caplinger insists?

Sources: BBC & Daily Finance


  1. HeeJu HeeJu

    I do not think it will just hurt American producers located in foreign countries who will be negatively affected by the dollar appreciation. What about domestic producers in export industry? While Caplinger seems to hold an optimistic view about the impact of fluctuating exchange rate, I am interested to see how stronger dollar will affect current trade deficit.

  2. On the US importer side, the extent to which an appreciation of the dollar is used to increase margins rather than decrease sales is termed “pass-through”. There’s a lot of empirical work on what sorts of goods tend to pass through most of the benefits of an appreciation to consumers, and which tend to pocket gains for themselves. Surprise, surprise, this is more true in concentrated industries and in industries with strong product differentiation, that is, where profit margins are not subject to being competed away.

    For US exporters, the challenge is the opposite. If they’ve worked for years to develop a market presence, they may be willing to “eat” their former margin in order to offset the affect of the appreciation by holding prices and holding onto market share. After all, if it took 20 years to build up a previously very profitable business, a good manager won’t want to close it down because of a (potentially) short-term swing in exchange rates. This of course is a bet on how long and how strong the dollar will remain, before “normal” profit margins are again possible.

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