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 $139 on January 1, 2009.*

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 our key concerns is the inflationary impact of present market interventions and policies. Moreover, if a currency loses value relative to other currencies, this may compound inflationary pressures, as imports become more expensive.

Even if you personally don’t buy anything direct from abroad, U.S. corporations import a great deal. In 2008, the U.S. imported goods worth $820.8 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 January 1, 2009, U.S. $1.3973 were needed to buy 1 Euro.