Q & A : Like or Not, Battered Buck Affects You

The latest dollar plunge hits nearly every American--saver and shopper alike--in the pocketbook. Here are some answers to questions about how the battered buck affects you:

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Q: I earn and spend dollars. What do I care if they are worth less in yen?

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A: Products imported from Japan and Germany become more expensive as their currencies rise. Your car, your television set, your computer terminal--even your suits and ties--may have been manufactured in Germany or Japan. In addition, goods that are manufactured here may be made with raw goods from a foreign land.

And if you travel in Japan or Germany, prices in dollar terms will be higher.

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Q: Can’t I just stop buying foreign goods?

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A: Maybe. But the price of domestic goods could rise too because of competition. If the dollar’s decline boosts the cost of a Honda or Toyota by 10%, General Motors and Chrysler can raise their prices anywhere between 1% and 9% and still have a competitive advantage, notes Joseph Wahed, chief economist at Wells Fargo Bank in San Francisco.

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Q: Will they do that?

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A: Some companies are likely to; others may not. It depends on the competitive structure of any given industry, Wahed says. However, the threat is real enough to have the Federal Reserve Board worried about inflation.

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Q: What happens if this does spur inflation?

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A: Generally speaking, inflation prompts the Fed to hike interest rates. Inflation and higher interest rates produce a double whammy for consumers. When interest rates are hiked, consumers--already grappling with higher prices for food, cars and clothes--find they must also pay more for everything from credit card debt to home loans. Unless salaries rise equally fast, that translates into a declining standard of living: You pay more for necessities; you can’t afford as many luxuries.

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Q: Aren’t higher interest rates good for savers?

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A: In the short term, yes. People who sock their money into bank deposits are now earning around 6% on their money rather than the 3% they could get in January. However, the purpose of saving and investing is to maintain buying power at some point in the future, notes Donald P. Gould, president of the Franklin Templeton Global Trust. If your savings earn less, after tax, than the rise in inflation, you lose buying power with every dollar you save.

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Q: What about investors? Will this hurt my domestic stock investments?

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A: That largely depends on which types of companies you invest in. Some companies will be helped by the dollar’s decline because they sell U.S. goods abroad.

Just as foreign goods are now more expensive here, U.S. goods are comparative bargains overseas. As a result, shoppers in Germany and Japan are likely to snap up more Fords, Nikes, Coca-Cola and U.S. pharmaceuticals. Foreign companies could snap up more shares in U.S. companies too.

“The devaluation of our currency puts America up for sale,” Wahed says.

In addition, U.S. companies that compete primarily with foreign firms will have greater ability to raise prices. That may make companies more profitable, which could help stock prices.

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Q: So I should buy U.S. stocks?

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A: Not necessarily. There’s a less rosy--and equally likely--scenario that goes something like this: Inflation will rise. The Fed will move to stop it. That will cause an economic slowdown, which will hurt company profits and U.S. stock prices.

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Q: What about U.S. bonds?

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If the devaluation of the dollar spurs inflation and higher interest rates, those who invest in U.S. Treasuries will get kicked in the teeth again. When interest rates rise, the value of older, lower-rate Treasuries drops.

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Q: What about my foreign stocks and bonds?

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A: If you invest in foreign bonds, most likely through mutual funds, you’re a winner in today’s currency crisis. Since the beginning of 1995, J.P. Morgan’s non-U.S. bond index has climbed 9.7%, says Christopher Orndorff, principal at the investment firm of Payden & Rygel in Los Angeles.

How this will affect foreign stocks is unclear, though. European and Asian exporters may be hurt by sluggish U.S. sales or declining profit margins. (Some companies may opt to accept lower profits on U.S.-sold goods simply to keep market share.)

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Q: Will this bail out my investments in Mexican stocks and bonds?

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A: No. Although the U.S. currency is faring poorly in world markets, a few currencies--including Mexico’s and Canada’s--are doing even worse. If you invest in Mexico or Canada, you’ll be hurt by currency exchange rates rather than helped.