What a Weak Dollar Means for U.S. Shoppers

WHAT DOES A WEAK DOLLAR mean for your wallet? Simply put, the weaker the dollar, the more you pay for imported goods such as that favorite bottle of Château Lafite-Rothschild from France or that Mercedes-Benz S-Class from Germany. "Currency fluctuations immediately affect prices," says Michael Woolfolk, senior currency strategist for The Bank of New York Mellon.

But that change is more on manufacturers' bottom line than price tags, he says. Just how much, and how quickly prices fluctuate depends on several market factors. Where the goods come from will have a significant impact. You can expect to see more of a price hike on products from Canada, Australia and Europe than those from Asia. That's because many Asian currencies — including the Chinese yuan and the Hong Kong dollar — are pegged at or near the U.S. dollar, meaning the values of these currencies tend to move in tandem.

Market competition plays a role, too. Although retail sales in January were surprisingly strong, retailers are bracing themselves for a recession and slower consumer spending. "[There will be] none of these across-the-board price increases," says Milton Pedraza, president of Luxury Institute LLC, a market research firm. "It's going to be very surgical."

If there's good news, it's that the dollar's recent decline represents a relatively small slide in a six-year plunge, which has seen its value decline by about 38% against the Fed's trade-weighted index of major world currencies. "The dollar has been weakening against the major currencies for several years, so the bulk of price changes have already taken place," says Tony Gao, assistant professor of marketing at Northeastern University. "The question is really how much further."

Big-ticket items such as cars, jewelry and wine are traditionally hit hard when the dollar weakens. Here's what to expect:

The issue with gold is twofold. Typically, when the dollar is beaten down, investors flock to gold as a safe-haven investment. That's definitely been the case in recent weeks. (Gold hit an all-time high January 28 at $927 an ounce.) On top of that, gold is priced in U.S. dollars, which means foreign buyers can buy it at a discount to U.S. consumers as the dollar continues to fall, which drives up demand and therefore prices.

And while some jewelers set prices by what they paid at the time they bought these precious metals and gems, others continuously jack up prices to reflect the going rate. That makes it crucial for consumers to comparison shop, warns Renée Newman, author of "The Jewelry Handbook." "It's no longer a given that a more expensive piece is better," she says. You'll need to research — and then compare — those factors that affect a piece's quality and desirability. An independent appraisal couldn't hurt either if you're eyeing a particularly expensive piece. (For tips to help you separate the real sparklers, click here and here.)

Look for the biggest increases in machine-made jewelry. "There, you're paying mostly for the metal and gems," she says. "If it's a custom-made, one-of-a-kind piece, you're probably paying more for the craftsmanship."

There are a few bargains to be had at the jewelry counter. Because diamond prices are directly pegged to the U.S. dollar, prices of average-quality stones should be heading lower, says Martin Rapaport, founder of the Rapaport Diamond Report. That's not the case for high-end stones, however. If you're looking for an engagement ring or other jewelry focusing on one or two flawless stones, expect to pay a premium.

More substantial changes will show up next fall, when the wines crafted this year are released on the market. But it's tough to anticipate how much of the change would be a result of the declining dollar as opposed to, say, a particular vintner or region producing a very good year, says MacLean. "The vintage factor is always a large part of the price," she notes.

If there are any increases due to the weak dollar, you can expect them to kick in slowly over the course of the next year as manufacturers replace diminished imported stock with newly built, higher-cost cars. Aiding the snail's pace are the foreign auto makers' North American plants, whose products are considered domestic goods. (More than half of U.S. Volkswagen models, for example, are built at its Puebla, Mexico, plant, while BMW recently announced plans to increase production at its Spartanburg, S.C., location.)

Looking at the whole picture, this year might actually make for a better year to buy an import, says Jesse Toprak, executive director of industry analysis for Edmunds.com. As the U.S. dollar has declined, European auto makers have offered bigger rebates. "If you look at the prices, they're not going up," he says. "But the incentive spending is going up dramatically." In 2003, an auto maker could offer $2,000 cash back at a cost of €2,040 to its bottom line. Today, spending that same sum enables them to offer more than $2,900 in rebates to U.S. customers.