The dollar is king of the hill again -- at least for now.
Amid the cascading credit crisis, the U.S. currency has reclaimed its status as the world's haven in tumultuous times. With investors rushing to sell everything and shove the proceeds into dollars, the greenback has gained more than 11 percent against the euro in October alone. Since the spring, when the mortgage crisis picked up speed, the dollar has gained some 22 percent against the euro. It has also strengthened against the British pound, the Swiss franc, the Australian dollar and others, though it's weaker against the Japanese yen.
This reversal halts, at least temporarily, a longstanding bearish trend that had seen the greenback slide against major world currencies for much of this decade. Today's newfound strength has consequences for investors, consumers and travelers. A more robust dollar weakens the benefit of investing abroad, yet makes imports, commodities and even an overseas vacation more affordable.
"All those things that had been hurting the consumer have now reversed," because the stronger dollar is bringing down prices for oil and other commodities that had been pinching pocketbooks, says Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. Still, she notes, the dollar's rise "isn't because we're in a fabulous economy. It's for mechanical reasons, as so much money around the globe is rushing to safety."
Indeed, the dollar could just as easily, and quickly, lose its current swagger. The greenback's underlying fundamentals were weak before the credit crisis began, what with elephantine budget and trade deficits and an inescapable date with looming Medicare and Social Security funding obligations. Today's crisis only amplifies the country's fiscal challenges.
For now, though, the dollar is a beacon amid dark days. Here's what that means to investment accounts and consumer pocketbooks:
A strong dollar pushes down the value of foreign assets, from stocks to bonds to real estate. That's because anything earned or priced in foreign currencies is worth less in dollar terms.
This compounds the declines U.S. investors have already suffered in overseas stock markets. Take, for instance, Brazil, one of the emerging markets hit hard by the flight to safety. In local terms, Brazilian stocks have plunged about 53 percent this year. But because of the dollar's gains, Brazilian shares are down 64 percent for U.S. investors.
The stronger dollar will hurt some U.S. companies as well. Multinational companies that depend on overseas units will take earnings hits. And domestic manufacturers will have more trouble exporting because their goods will cost more in foreign markets.
Rob Arnott, chairman of Research Affiliates, a Newport Beach, Calif., institutional investment manager, is eyeing companies, such as domestic utilities, that won't be hurt by a strong dollar.
Jim Stack, president of InvesTech Research, is moving in the same direction. With 55 percent of its holdings in cash, this Whitefish, Mont., money-management firm is tiptoeing back into the market. "We're thinking more in terms of domestic stocks, not international, because of the strength of the dollar and the likelihood that this will continue for the next six to 12 months," Stack says. That means, he adds, companies like Verizon Communications Inc. (NYSE: VZ), Varian Medical Systems Inc. (NYSE: VAR) and Laboratory Corp. of America (NYSE: LH) should fare well.
The strong dollar is also hurting savers who've stashed cash in foreign-currency savings accounts and certificates of deposit, which have become a popular way to invest in overseas economies without the risks inherent with long-term holdings in stocks and bonds.
"Those people who came in only searching for big yields" in the Australian and New Zealand dollars, Brazil's real and the South African rand "are panicking and selling," says Chuck Butler, president of St. Louis-based EverBank World Markets, where investors have stashed some $1.1 billion in foreign-currency accounts. In the case of Iceland's krona, all but frozen amid a banking meltdown on the North Atlantic island, "people are hung up trying to sell out. It's ugly."
A strong dollar will make imported goods cheaper, but don't expect any wild bargains just yet.
Melanie Cox, chief executive of the hip Scoop NYC boutique chain, with 14 stores in the U.S., says that by next month, some European designer clothing at its stores will be priced 15 percent lower. She points out, though, that price decreases will be "on a case-by-case basis," depending on how flexible brands are willing to be with their suggested retail prices.
One reason price decreases on European designer goods won't be widespread is because overly cautious retailers have ordered less merchandise than usual, cutting inventory as much as 30 percent. So tight supply could keep prices up in some cases, says Pat Conroy, a vice chairman at Deloitte LLP.
Some prices might look lower but actually be the result of brands expanding their more affordable, entry-level lines, says Claudia D'Arpizio, a Milan-based partner with Bain & Co. European luxury-goods houses had been ramping up lower-priced parts of their collections in an effort to appeal to sticker-shocked consumers in America. Brands had increased prices between 10 percent and 20 percent on average in 2007 and 2008, in part due to the stronger euro, she says.
Susan Flax Posner, a tax attorney in Owings Mills, Md., who loves to wear Manolo Blahnik shoes and clothes from Missoni, has held off on buying many of the European brands she favors, choosing instead less-expensive American brands, or waiting for big sales. Even with the prospect of potentially lower prices for European designer goods, the mother of two says she'll continue to hold off. "With the stock market and the current state of the economy, you feel one-third less rich. ... I don't feel like going out and spending, as much as I enjoy buying Prada."
Fans of fine European wine should see prices slide between 10 percent and 15 percent on some wines bought more recently on the spot market, says Peter Morrell, chairman of Morrell & Co., a New York-based wine merchant. However, lower prices on wines bought in bulk will take several months to show up.
Those who covet luxury European car brands shouldn't anticipate seeing lower sticker prices for the foreseeable future. Jesse Toprak, an analyst with auto-research firm Edmunds.com, says European auto makers had to slap big incentives on their cars in the U.S. market as the euro strengthened in recent years, making foreign cars more expensive here. Now, he says, European car makers are likely to take advantage of the stronger dollar to improve their profit margins and leave pricing in the U.S. market unchanged. Still, with the weaker economy, they're not likely to pull the incentives off either.
For the moment, international airfares in and out of the U.S. don't appear to be dropping across the board, though that could change as fuel prices continue to fall and demand for travel prompts airlines to cut fares to lure buyers. Expedia Inc. (Nasdaq: EXPE), the online travel agency, says the average roundtrip economy-class flight to London from New York is $697 this December, a 14 percent increase compared to last year. The exception is Iceland. If you can handle the near all-day darkness, the average ticket to Iceland from New York airport this Dec. is $811, 21 percent lower than last year.
But the dollar's rise is good news for some Americans. Suddenly, shopping trips to Paris or London have become more affordable. The most extreme deals are in countries like Iceland, Hungary, South Africa, Brazil and Mexico, where local currencies have plunged against the greenback.
Raleigh, N.C., resident Kevin Scott says he and his wife swore off their annual trip to Europe this spring. "With the dollar slumping, we were going to South America," says Scott. But with the dollar's climb, Europe is back on the itinerary. "This year it would make sense if we go to Iceland on the way to Finland, Demark, and maybe Copenhagen."
At Hotel Ranga, a luxury hotel in southern Iceland, anything for which labor figures largely in the price -- like tours or spa treatments -- is about 50 percent cheaper than a year ago because a dollar can buy more kronur, says manager Bjorn Eriksson. The bargains also apply to some goods, like fish caught locally and served in the hotel restaurant. But the savings could end for tourists in Iceland who buy imported products there, because the value of the krona has dropped in global markets.
Many hotels in Iceland have switched to listing rates in dollars or euros because of the krona's collapse. But travelers may find the best deals at hotels that still list rates in kronur. At the Hotel Reykjavik Centrum, a double room without breakfast costs 17,200 kronur, or about $144 per night this winter, but the euro price for the same room booked through travel agents is 190 euros, or about $240.
American travelers seem to be booking more trips abroad in the past few weeks as the dollar strengthens, based on ancedotal evidence. Paul Gardiner, marketing director of the Mantis Collection, says that in the past two weeks Americans are showing a lot more interest in the South African and London properties of the luxury hotel and game reserve group. The company has had "a noticeable increase in traffic to the Web site out of the United States," Gardiner says. One dollar is now worth about 11 South African rand, compared with seven rand in August.
Twice as many Americans came to the group's London property, the Draycott Hotel, in September, compared with August. Business there now equals the traditionally busy months of June and July, says the hotel's general manager, John Hanna.