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Harlan Brandon knows shoes. After 15 years of designing them for companies such as Nautica and Fila, the 50-year-old New York City native stepped out on his own two years ago and launched HBF Collection, his premier line of shoes. But his extensive knowledge of shoes was not enough to ward off a threat to his budding business. The designer-turned-entrepreneur would soon get a crash course in currency valuations.
His introductory line of shoes was manufactured in Italy, then imported to the U.S. so that major department stores could review his designs. The shoes are priced between $90 and $110, but soon after opening shop, Brandon realized he wouldn’t be able to turn a profit. “When I started out, I was just making it,” Brandon explains, “then the euro got stronger and stronger. … I just couldn’t continue.”
During Brandon’s first year, the dollar weakened progressively against the euro, and a weakening dollar buys less units of a foreign currency. In August 2002, when Brandon began purchasing Italian components, it cost 98 cents to buy one euro. By August 2003, it cost $1.16. Brandon saw his costs increase by 18 cents, and his profit margin virtually disappeared. Instead of raising the price of his shoes, Brandon moved manufacturing to India, where the dollar is still strong. His experience is one example of how currency fluctuations and a weak dollar can directly impact business owners. When the dollar is weak, business owners face higher costs, which potentially trickle down to consumers in the form of higher prices.
WHAT DRIVES THE COST OF MONEY?
The pricing of money occurs on the foreign exchange market, also known as forex. It is the largest financial market in the world. More than $1 trillion is traded daily — U.S. dollars for euros, euros for yen, etc. Just as the value of a U.S. company is set by the U.S. stock market, a country’s currency, when left to free market dynamics, is determined by forex.
During the last two years of the Bush administration, the U.S. dollar has plunged in value against the world’s major foreign currencies, more than 22% since early 2002. Some experts point to the increasing federal deficit as a primary reason. The Congressional Budget Office projects the deficit will hit $422 billion this year. According to Joseph Davis, an investment analyst and economist with the Vanguard Group, two factors have played a key role. One is the record-low, short-term interest rates, which have recently begun to rise through the actions of the Federal Reserve. The other is that the U.S. trade-deficit-to-GDP ratio is roughly 5%, a level many economists say is unsustainable.
WHEN THE DOLLAR IS WEAK
A weak dollar not only affects business owners with international operations like Brandon, it also influences whether Americans can afford a trip overseas and how much they spend in a foreign country. Pete Anderson, for example, a 36-year-old newlywed, understood how a weak dollar could affect his honey-moon with wife Lisa. While traveling to Indonesia several years earlier as part of an M.B.A.