This is the first installment of "Dollars and Sense," a biweekly feature on the financial and economic issues that impact students' lives.
To foreign language majors, the name Schoenhof probably sounds familiar: each semester, such students are directed to Schoenhof's, a foreign-language bookstore located in Harvard Square, to pick up literature from around the world.
Students that visited the store at the beginning of this semester, however, may have noticed a change in the store's entranceway this time around - a sign indicating that prices of certain books have risen due to the declining dollar against the euro.
"We didn't raise prices until we really, really had to," said Rupert Davis, the store's manager. "We probably should have raised them sooner - the dollar has been declining against the euro for the last two years."
Late last year, the dollar began to steadily fall as concerns grew about the increasing U.S. trade and budget deficits. The euro, on the other hand, reached an all-time high by the end of Dec. with a value of $1.3667. The euro has recently been trading at about $1.30.
As a result, "we had no choice but to raise prices on all books we pay for in euro," Davis said. "We pay for about half of our stock in euro."
Assistant Professor Sunghyun Kim, who teaches courses in International Finance, said that due to the weaker state of the dollar, "all import good prices go up, and this negatively affects consumers."
Not only does the weaker dollar have negative implications domestically, it also affects Americans abroad. "American students traveling to Europe will have to spend a lot more to get the same products," Kim said. "Americans who have dollars are going to be worse off because the euro is more expensive."
Junior Jim Fraser, who is currently studying abroad in Scotland, noticed his wallet becoming a little thinner as he converted his dollars to pounds. "With the pound around $1.90, I realize that my money is going to go pretty fast unless I'm very careful," Fraser said. "So I'm only exchanging what I have to for the time being and hoping that the dollar will get stronger before I need to change any more money."
Though students abroad and those purchasing imported products may feel cheated, Kim said that there is more than one angle to this story. "You have to look at the other side of the story - the indirect effects," Kim said. "All imported goods to the U.S. become more expensive, so consumers will buy more American goods. They tend to spend more on American products competing with imported goods in the same markets."
"Then you have to consider yet another part of the story - export goods have become way cheaper, so exporters are making a lot of money," Kim added.
Kim illustrated this logic with a numerical example: "Say the cost of making an export good is $100," he said. "Since there was a one-to-one dollar-to-euro ratio, the exporter used to sell it at 100 euro."
"Now, there is a 1.3-to-one dollar-to-euro ratio, so the exporter can continue to sell the good at 100 euro, but now have it worth $130 and make a profit," Kim said. "Or, the exporter can lower the price in terms of euros and can still receive $100."
"People in other countries will buy more American exports and exporters can sell more," he said. "In general, when the dollar depreciates, importers are worse off and exporters are better off."
Who are the other "winners?" Kim points out that "European students studying in the United States can spend a smaller amount of euros in tuition because the dollar is cheaper."
"If you have family in Italy sending you money, it's also good," Kim added.
Those who find themselves on the "losing" side may find hope in recent news: the Associated Press reported Monday that the euro dropped below $1.28 for the first time in months.
The current gains of the U.S. dollar have been attributed to President Bush's budget proposal, as well as statements made Friday by U.S. Federal Reserve Chairman Alan Greenspan, who seemed to imply that the United States is on the road to fixing its huge trade deficit. The AP found that traders interpreted Greenspan's comments as saying that a weaker dollar is not necessary to reduce the U.S. current account deficit.
Consumers should probably not get too excited, however. Since the Fed's meeting did not introduce a great deal of policy changes, the market remained relatively unaffected by the recent developments.
It's not only too early to see what lies ahead for the dollar, it's also far too soon to calculate the effect the depreciated dollar has had on business at Schoenhof's. "I would give it about six months before we would be able to tell," Davis said.
Davis observed, however, that customers have not expressed a great deal of dissatisfaction with the increased prices. "We expected a lot more mumbling, and we were surprised," Davis said. "It's as though people expected it. People haven't responded with a great deal of annoyance so far."
