The declining value of the U.S. dollar should allow PC vendors to offer bargains to people living in the euro zone, while U.S. consumers probably won’t feel much of a pinch, according to a leading economist.
The U.S. currency has suffered from a decision by the Federal Open Market Committee to lower the federal funds rate 50 basis points to 4.75 percent. That’s the rate financial institutions charge each other for overnight loans and it has a big impact on overall interest rates in a country.
The lower rate hurts the dollar because it causes investments to flow out of the U.S. to find higher interest rates elsewhere, such as England where the rate is 5.75 percent, or Australia where it is 6.5 percent. The Fed said it reduced the rate to stave off credit problems associated with the bad-loans crisis in the U.S. housing market.
A negative side affect for people in the U.S. is that the falling currency is leading to higher prices for some commodities. The price of oil, for example, rose to a record US$83 a barrel on Thursday, largely due to the cut in the federal fund rate, according to Robert Mundell, professor of economics at Columbia University and the 1999 winner of the Nobel Memorial Prize in economics.
Oil is traded globally in U.S. dollars, but oil traders have bid the price per barrel higher to offset the declining value of the U.S. dollar. Higher oil prices raise fuel costs for consumers, including heating oil and gasoline, and potentially mean higher prices for airplane tickets and shipping rates.
The situation is far different for computer components, despite the fact they are also bought and sold in U.S. dollars around the world. While oil producers have the power to raise prices in order to compensate for the weaker dollar, makers of computer parts, for which the market is far more competitive, do not have the same type of leverage.
The good news for people in the euro zone is that the euro rose to a record high against the dollar after the Fed’s rate decision, so people in countries that use the euro should see bargains for a number of IT items. Currency traders bid the price of the euro to US$1.41 on Friday, up from US$1.37 at the beginning of September and US$1.39 a day ahead of Tuesday’s Fed rate cut.
By comparison, the euro bought only US$0.82 at its low point in October 2000.
The stronger European currency should bring more bang for the buck, so to speak, unless retailers take advantage of better exchange rates to boost their own profits.
For Americans, the news isn’t bad. Despite the decline in the currency, component prices probably won’t rise, Mundell said, because most of the computer industry is located in the U.S. and Asia.
“Asia is a U.S. dollar area,” he said, during a briefing with reporters in Taipei on Friday. Computer components are bought and sold in the U.S. currency, and nations in the region generally tie their currencies to the U.S. dollar. In addition, manufacturers are constantly working to lower costs, and these reductions are valued in U.S. dollar terms.
One example of a computer component traded globally in U.S. dollars is DRAM (dynamic RAM), where prices have fallen dramatically this year.
The contract price of the most widely used DRAM, 512M-bit DDR2 (double data rate, second generation) chips that run at 667MHz, dropped to US$1.75 each as of Thursday, down 70.5 percent since the beginning of the year, according to DRAMeXchange Technology Inc., which runs an online trading site for the chips.
The chip prices are falling because producers are churning out too many chips and causing a glut on the market.