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|Subject: 5 Ways to Survive the Dollar's Dive Thu Nov 08, 2007 5:49 pm|| |
[color=#000000]The Financial Advisor5 Ways to Survive the Dollar's Dive
By Jeffrey Strain
Special to TheStreet.com
11/8/2007 1:07 PM ESTURL: http://www.thestreet.com/funds/the-financial-advisor/10389112.html
[color:4841=#000000:4841]As the dollar plummets in value vs. a myriad of foreign currencies, don't be caught by surprise at the ways it could affect your everyday life.
The dollar on Wednesday hit an all-time low against the euro, and has also been sinking against the Canadian dollar and Chinese yuan. It has even reached the point that top Brazilian supermodel Gisele Bundchen no longer wants to be paid in dollars.
If you may think that this has little effect on you, you might be surprised. The world is a lot smaller when it comes to commerce these days, and the weak dollar will likely affect your finances in more ways than you imagine.
Here are a five examples of how the lower dollar may negatively impact your budget and what you can do to mitigate the effects:
1. Higher-Priced Foreign Products
While the lower dollar is helpful for U.S. exporters, since it makes their products less expensive to sell to other countries, all the imports coming to the U.S. become more expensive. That means you'll end up paying higher retail prices for imported goods than you would if the dollar remained strong. This includes basics like food, clothing, raw materials, cars and many other products that you may not even realize are made overseas. The end result is that you will be able to buy less with the money you make.
What you can do: Seek out U.S.-made alternatives to the products you buy. If you know that you will be making a purchase on a big imported item, now is the time to look. With the discounting for the holiday season, you aren't likely to find it for less in the future.
2. Higher Oil Prices
One of the foreign imports that will cost more is gas. While supply concerns have had a major impact on the rising level of oil prices, the falling dollar also has had a big impact.
Oil-producing nations that export oil to the U.S. aren't willing to take the same amount for a barrel of oil when the dollar is decreasing in value, and thus demand more dollars for each barrel causing prices to rise. These increases are passed on to the consumer as higher gas and energy prices. This winter could be one of the most expensive in history, due in part to the falling dollar.
What you can do: If you have not done so yet, look at the many ways you can conserve gas, including during your commute, and control your home heating costs.
3. Higher-Priced Domestic Products
Why would domestic product prices increase when the dollar is low? Again, rising oil prices have a lot to do with it. With energy prices increasing, domestic products still need to be transported around the U.S. The increased cost of doing this ends up being passed on to the consumer as well. In addition, many of the parts that go into making U.S. products come from foreign countries. When the parts increase in cost, the products they are used in also increase in price.
While the cost of goods in the U.S. won't increase as much as those being imported, that doesn't mean you won't see the cost of domestic products much higher. As U.S.-made goods begin to look less expensive relative to the rising price of imported items, the situation creates a gap in price and competition eases.
It isn't in the interest of the U.S. companies to keep their prices low. They will raise prices so they are still less expensive than foreign competitors, but won't leave prices at low levels when they can pad their profit margins with little ill effect from the price increase. This means consumers end up paying more for both domestic and imported products.
What you can do: Stockpile non-perishable goods you know that you will need and use when you see a good deal. Also, begin looking at locally-made alternatives. For example, look at farmers' markets and other locally-grown food that won't include as much in transportation costs as part of their price.
If you are planning travel outside the U.S., it will be a lot more expensive than you anticipated. The dollar buys less and those foreign bargains are no longer a bargain at all. With the dollar buying less lodging, food and travel within the foreign country, any trip is going to cost a lot more than it did in the past.
While this may encourage you to travel within the U.S., that alternative still won't be cheap. Increasing oil prices will mean that travel expenses will be more costly than usual, meaning that your dollars will buy less in travel than they did before.
What you can do: If you want to go to a foreign country, look at Central and South America, rather than Europe, Canada or Asia. If you do go to Europe, plan ahead and buy euros in advance, if you expect the currency to further advance against the dollar. In the U.S., plan a more local vacation that won't entail a lot of fuel-burning driving or flights.
If you currently have debt, the falling dollar could come back to haunt your finances in a big way. While there are a number of reasons the dollar is falling, one main reason is that Americans import a lot more products than they sell abroad. The result is that the U.S. must borrow money to close the trade deficit.
As long as other countries are willing to buy our debt, everything is fine. But as the dollar loses value, it makes less sense for countries to invest in our debt when interest rates are so low.
The result is that the U.S. is forced to raise interest rates in order to attract investors to buy the debt, which could result in inflation and much higher interest rates for Americans. Interest rates may even eventually rise to double digits. That means that if you have any credit card debt, you are going to see your interest rates rise. If you have an adjustable mortgage, you will see your monthly house payment rise. In addition, if you need to borrow money for a car or house, it's going to cost you a lot more.
What you can do: Pay down as much of your variable interest rate debt as you can. Avoid adding to credit card debt.
Now that you understand how the falling dollar can affect your finances, you are in position to take the necessary steps to help ease the pain. These changes are already beginning to take place and will likely continue to increase, so the time to take action to ensure your personal finances and budget stay on course is now.
Jeffrey Strain has been a freelance personal finance writer for the past 10 years helping people save money and get their finances in order. He currently owns and runs SavingAdvice.com.