U.S. dollar's slide adds to rise in energy, food prices; '08 outlook unclear


1 day ago

NEW YORK - Americans grousing about soaring gasoline prices often focus on the big oil companies and anyone else who might profit when costs jump at the pump. But one factor that doesn't always get fingered when prices rise - a weak U.S. dollar - could draw more attention in the coming year.

The greenback's slide against the Canadian dollar and other major currencies in recent years has helped drive up prices in the United States for energy and food and, in turn, contributed to the economic hardship some consumers face.

A further drop in the U.S. dollar in 2008 could spell more trouble.

Dave Minucci listens to the chatter on Wall Street about the flagging dollar but doesn't have to look far to cast his own assessment. A recent home-heating bill was $120 higher than at the same time last year.

But Minucci doesn't blame lower temperatures. The chill he feels is from higher energy prices and a weaker currency.

He sees what many Americans may not realize: With commodities - from oil to natural gas, grain and meat - priced in dollars and becoming more expensive as the greenback falls, consumers have to take more out of their wallets to buy the same amount of goods. And a lower dollar can also raise the cost of imported goods - with the increase often passed along to consumers.

"I think we're in trouble with the weak dollar," said Minucci, who works in the Capital Markets Finance group at JPMorgan Chase.

The dollar has fallen because of concerns among investors worldwide about the U.S. economy, especially since a cascade of home mortgages has soured in the past year. And the dollar's slide itself has further eroded confidence among some investors who question whether currencies like the euro will be better able to hold their value in the coming years.

The volatility of the currency markets makes it impossible to predict the dollar's course in 2008, though many observers aren't laying down big bets on its recovery.

"I think the dollar should continue to decline," predicted Laura Ostrander, lead manager for the Columbia Strategic Income Fund.

Consumers are likely to notice a further pullback because it already costs more to stock the refrigerator these days. Since the start of 2007, milk prices are up 23 per cent, while the cost of a dozen eggs has risen more than 40 per cent.

Overall inflation is running at 5.6 per cent, largely due to sharply higher energy costs as oil approached $100 a barrel. But the costs of food, clothes and medical care have also increased.

Of course, it's not just a weaker currency that's to blame for rising prices. There is surging demand for food and energy in China and other developing countries where industrialization is propelling seismic economic shifts.

Minucci thinks people are too quick to blow off concerns about an anemic dollar as irrelevant to their daily lives. But the numbers can be startling.

The greenback has fallen 11 per cent against the euro since the start of 2007 and 24 per cent against the 13-country currency since the beginning of 2006. And the Canadian dollar is up about 18 per cent on it U.S. counterpart this year, trading above parity for the first time in decades.

"I get the feeling that a lot of people are just being oblivious as to what is actually going on around them. I sit at nighttime crunching numbers on my finances and I still see people spending," Minucci said.

His living expenses are up five to seven per cent in the past year. Besides buying a more fuel-efficient car, he has tried to tamp down his family's spending.

Minucci, who lives in Princeton, N.J., sees a link between a weakening currency and dented faith in the U.S. economy, particularly among foreign investors whose appetite for the dollar has great sway over its strength.

Sean Hannon, an investment adviser, shares Minucci's concerns and believes the dollar will continue to decline and put pressure on prices.

"From the U.S. consumer's perspective everything we need is going be more expensive. Our quality of life is slowly going to decline. And it's just sapping the American economy," he said.

Travelling abroad might not be as appealing for many American tourists either.

Dan Yu, a certified financial planner at Eisner LLP's Personal Wealth Advisors group, says his clients are often frequent travellers and have felt a pinch from the dollar. While he believes the dollar's pullback has been overdone, he doesn't expect a sharp rebound.

"I do think over all the dollar is oversold but a lot of things have to be fixed first," he said.

Yu said many investors worldwide have to sort out concerns about the U.S. housing market, as well as get a better sense of how many now shaky mortgages will go bad and hurt bank's finances before they'll be eager to snap up the dollar.

And, of course, a weak currency isn't bad for everyone in the U.S.

Exports have risen as goods made in America are suddenly cheaper in many places outside the country. Plus, with stronger foreign currencies, both investors and shoppers from outside the U.S. see "sale" signs splayed across much of America - on everything from sweaters and iPods to businesses and real estate.

"Foreigners are coming here and gobbling up retail items such as clothes and jewelry and technology," Yu notes.

Growth in the U.S. from rising exports and the Federal Reserve's recent campaign to lower interest rates could stoke economic growth and help the dollar, according to Margie Patel, senior portfolio manager at Evergreen Investments.

"I think the most important thing for a strong dollar is a good economy," she said.