Adhvith Dhuddu, CT Regular Columnist
Wednesday, October 17; 12:00 AM
A vacation in Toronto, Paris, London or Rome will drain your wallet more than you can even imagine, and it's all thanks to a weak United States currency. A holiday across the Atlantic or north of the border in Canada is considerably more expensive compared to a few years ago.The last few months have been harsh times for the U.S. dollar. The value of the dollar has been constantly declining, leaving it worth less than European, Canadian and other currencies. Unfortunately, the severity of the dollar's decline hasn't been fully realized. Politicians don't raise this issue during debates, and no conscious efforts are being made to stop or reverse this trend, which has been in existence for a few years now.
The suppressed purchasing power of the U.S. dollar is a troubling issue, and it undoubtedly affects you and me. Besides costlier European getaways, there are several other negative ramifications of a weak greenback.
Just five years ago, the dollar and Euro were equal in value, making your stay in Paris relatively reasonable. Five years ago, $100 was equivalent to £65, but now you'd get about £50 for your $100. Sadly, the same is true if you head up north to Canada, where $100 used to be worth close to $130 Canadian ; now they are equal in value. Similarly, many other foreign currencies have strengthened against the U.S. dollar.
Many U.S. businesses buy goods (both raw materials and final goods) from abroad, and because of the weak U.S. dollar, the cost of these goods has automatically gone up. As the dollar loses value, it can buy less and less from abroad for the same amount of money. Almost all businesses pass on this extra cost to the consumers; we end up paying more for these products and don't often even realize it. The same is true for various services that are outsourced and off shored to South Asian countries. As the local currency strengthens, U.S. businesses who earn their revenues here in U.S. dollars will have to charge consumers more to keep up with a weak U.S. currency.
A dollar is not worth a dollar; it's worth the amount of goods and services it can buy. So, if the same dollar buys fewer goods today compared to five years ago, its value has clearly decreased. The best (and the most universal) benchmark is measuring the strength of the dollar against gold. And even here, the dollar's weakness is clearly seen.
Many countries have their foreign exchange reserves in U.S. dollars, and because of the dollar's continued weakness, the value of these reserves is constantly decreasing. So when foreign governments realize this and start to get rid of U.S. dollars, the weakness of the currency will persist. Soon new foreign names will appear on the list of the world's wealthiest people, another consequence of the weak dollar. Bill Gates and Warren Buffet will be dethroned by successful industrialists from India and Mexico.
The weakening dollar is a result of poor fiscal and monetary policy, and people can hedge themselves against this in a few ways. Buying precious metals like gold, silver and uranium, or having a small percentage of your savings in another currency, will help ward off some of the dollar's weakness.
You could also buy a bearish dollar Exchange Traded Fund, which increases in value if the dollar weakens. An ETF is just like a stock that you can buy and sell, so owning this ETF will offset the decrease in the dollar's value.
It's important to learn about these vital issues at a young age. Knowing how to navigate the seas of a complicated financial ocean early will greatly help in honing money management skills. For further reading, the books, "Hot Commodities," by Jim Rogers and "Cash Proof," by Peter Schiff, explore this issue in more detail.
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