The weak dollar produces both winners and losers. Here's a rundown of who is who:
- U.S. multinationals that sell in global markets. High-tech companies such as Intel, Cisco and Microsoft. Aviation giant Boeing. Even McDonald's (yes, they eat a lot of Big Macs in Europe).
- Dollar bear Warren Buffett — his Berkshire Hathaway fund has made a multi-billion-dollar bet in favor of the Euro.
- European shoppers snapping up bargains all across the U.S.
- The U.S. tourism industry
- Investment funds denominated in Euros
- Americans traveling overseas, especially to Europe (ouch!), and Americans who work overseas and are paid in dollars.
- Foreigners with investments denominated in dollars
- American motorists: As the dollar weakens, oil-producing nations demand even higher prices to compensate for the dollar's reduced value — and that means higher prices at the pumps.
- American consumers: Imported goods from Europe will cost more, whether it's Italian glassware, French wine, a Volkswagen or a BMW.
- Companies and consumers that rely on cheap credit to make purchases and investments. International investors demand higher interest rates when the dollar falls in value. Otherwise, they'll move their money elsewhere.
- The Federal Reserve Bank: Fed policymakers have less room to cut interest rates when the dollar weakens, for fear that all those foreign imports (which now cost more) will fuel inflation.
The surge in energy prices coupled with a crumbling housing market and tight credit are expected to constrict the U.S. economy as consumer confidence wanes.
Federal Reserve Chairman Ben Bernanke on Thursday detailed the economic picture for lawmakers, particularly stressing the blow the economy has had to absorb from the subprime mortgage debacle.
"[T]he economic outlook has been importantly affected by recent developments in financial markets, which have come under significant pressure in the past few months," Bernanke told Congress' Joint Economic Committee. "The turmoil in financial markets significantly affected the Federal Reserve's outlook for the broader economy."
Hours after Bernanke appeared on Capitol Hill, the stock market closed to another loss. According to preliminary calculations, the Dow Jones industrial average fell 33.73 points to 13,266.29, the Associated Press reports. Thursday's fall comes a day after the blue chips tumbled more than 360 points.
Mortgage Crisis Continues
The mortgage industry plunged into distress this summer as more borrowers missed payments on their home loans and investors soured on risky mortgage debt. This made it harder to sell home loans and forced dozens of lenders out of business.
More recently, leading investment firms Merrill Lynch and Morgan Stanley have announced that missteps in subprime investment caused them to write-off billions of dollars.
The fallout isn't over. Homeowners who took the risk of subprime and adjustable-rate mortgages increasingly cannot make higher payments as their loans reset.
"Delinquencies on these mortgages are likely to rise further in coming quarters as a sizable number of recent-vintage subprime loans experience their first interest rate resets," Bernanke testified.
After his prepared remarks, lawmakers lectured Bernanke about higher health-care costs and the social responsibility of making credit available to the poor. The Fed chairman was also pelted with questions about inflation, recession and the dollar's historic lows.
But most questions focused on turmoil in the housing market.
Bernanke would not assert that the economy was headed for a recession, though he did say the severe housing slump will hurt business growth.
"Weakness in the housing market will keep construction in a down trend," Bernanke told lawmakers.
Asked how to advise those in need of immediate help untangling a mortgage snare, Bernanke said, "Get in touch with your lender because experience shows the earlier you do so you'll be able to resolve the matter."
Though he reminded lawmakers of the Fed's first responsibility to maintain a healthy economy, he also sought to assure them that the Fed has a role in working with financial advisers serving lower- and lower-middle income communities to try to help them identify strategies to help.
"In these dimensions, we are doing what we can as a central bank to assist in resolving this problem," Bernanke said. "It has implications for individuals and the broader economy."
In recent months, the Federal Reserve and other banking agencies have issued statements calling on mortgage lenders and mortgage servicers to find prudent ways to resolve loan problems with existing borrowers.
He noted that stricter lending terms are now even hampering creditworthy borrowers.
Bernanke's testimony wasn't able to soothe Wall Street. The Dow dropped by triple digits after the chairman's testimony before rebounding to close down 33 points.
Bernanke was last before lawmakers in March. Since then, there has been a mixed bag of economic reports.
For example, the gross domestic product rose 3.9 percent during the July–September quarter, indicating the overall economy has some resilience. But sales of existing homes plunged a record 8 percent in September, marking the largest decline since 1999.
None of these factors bode well for consumers' confidence as they struggle with common living expenses, such as higher home-heating fuel and gasoline costs. That blurs the outlook for the upcoming holiday shopping season as well.
Retailers Report Losses
Retailers announced Thursday disappointing sales for October due to consumers' ongoing worries about housing and energy prices. The downbeat news came from all sectors, including mall-based apparel stores like Limited Brands Inc. and department stores like Macy's Inc. Even upscale Nordstrom Inc. posted a rare sales decline, while discount giant Wal-Mart Stores Inc., the world's largest retailer, posted sales below expectations despite its aggressive discounting heading into the holidays.
"Indicators of overall consumer sentiment suggested that household spending would grow more slowly, a reading consistent with the expected effects of higher energy prices, tighter credit and continuing weakness in housing," Bernanke said.
He made the comments a day after sharp declines in the stock market while crude oil moved closer to an unprecedented $100 per barrel.
The Dow Jones industrial average finished down 360 points on Wednesday and the dollar plunged to a record low against the euro as investors became nervous about the record rise in oil prices, as well as the prospect of a recession in the United States.