Why does the value of the U.S. Dollar matter to me?

A night in a hotel in Europe on October 26, 2000 charging €100 would have cost you less than $83; the same hotel, had it kept its price unchanged at €100, would have cost you over $157 on March 17, 2008.*

You may not care much about the cost of a hotel in Europe if most of your expenses are in U.S. dollars and inflation has been tame over the past couple of years. However, one of the questions we ponder is whether inflation can be far behind when a currency loses so much value against other currencies. We have already seen inflation on anything we cannot import from Asia (most notably at the gas pump, in healthcare, and education).

Even if you don’t buy anything direct from abroad, U.S. corporations import a great deal. In 2007, the U.S. imported goods worth of $815.4 billion more than it exported. As the goods corporations import get more expensive, their production costs go up. In this section we discuss how such an environment may have implications on corporate profitability and indirectly on you and your investments. Let’s first look at what has contributed to the U.S. dollar’s decline.

Next: What has caused the U.S. Dollar to fall?

* Source XE.com: On October 26, 2000, when the Euro was at its historic low, you needed U.S.$0.827 to buy 1 Euro. On March 17, 2008, U.S. $1.5756 were needed to buy 1 Euro.