WGN-TV Show Notes
If you’re planning a trip to Europe or Asia this summer, you’d better save up a little extra cash.
The dollar is worth a lot less than it was last year at this time.
Over the past decade, the price of oil and the value of the dollar moved in tandem. If oil went up in price, the dollar got stronger. But all that changed about two years ago, leaving economists scratching their heads, wondering what will happen to the dollar, not to mention the U.S. economy, if the price of oil really hits $100 per barrel.
“The key issue about the dollar is that we haven’t seen the dollar plummet,” says Diane Swonk, Mesirow Financial.
Instead, it’s been a slow decline to where it is now: about $1.30 to the Euro. Your $4 latte at Starbucks would cost nearly $6 bucks in London. But it isn’t just the skyrocketing price of oil that’s causing consternation with our currency. A number of economic forces are conspiring to make our money worth less abroad.
“The view is that the U.S. economy has to get its house in order. We need consumers to stop spending money they don’t have to assure those investors that the economy is strong and it is really being built up with real growth as opposed to borrowed growth,” says Amy Crews Cutts, Freddie Mac.
So far, foreign investors have been buying up U.S. debt as fast as the government can issue it. For American consumers, all this has meant the lowest interest rates in 40 years.
“We’ve been able to buy cars at very low financing costs, we’ve been able to fund our college educations and other things we fund with debts at very low rates,” Crews says.
Thirty percent of Americans have actually improved their balance sheets by trading higher priced loans for less expensive ones. And for the rest of the world?
“We’ve become a fire sale to many Europeans,” Swonk says.
Who are spending strong euros to buy things like the Chicago Skyway for $1.8 billion. But they’re also using the strength of the Euro to buy oil.
“If you want to find the impact of the dollar, you can find it a lot in the price of oil. Because foreign countries, like Europe and Japan are buying their oil in dollars but are paying for it in their own currencies,” Swonk says.
Buying it in dollars and paying for it in Euros means they pay 30 percent less for a barrel of oil than we are. They’re also paying a third less for everything else they’re buying, like plane tickets to visit Chicago this summer.
“Europeans are finding it very inexpensive to travel over here,” Swonk says.
But the reverse is true if you’re taking off for a trip abroad.”If you’re traveling, the one thing you can do is go to an ATM machine and withdraw money that way. At least you’re getting capital markets exchange rates rather than the money lender exchanges you see in the streets,” Crews says.
This week, several oil analysts released reports indicated that the price of a barrel of oil could spike to more than $100 before the end of the year. To get to where we were in the 1970s, you know, with gas lines, inflation and the stagnating stock market, the price of oil would have to hit $93 per barrel and stay there for awhile. So for now, we’re a long ways off.
Need personal finance advice or real estate advice? Send your questions to Ilyce Glink: www.ThinkGlink.com
April 7, 2005.