Sunday, December 03, 2006

Currency Exchange Rates - US Dollar (huh? Why should you care?)

Perhaps you have heard in the news a commentator discussing the US dollar and it's "value" vs other currencies. That the dollar has "hit a low". All gibberish eh? Who cares about this stuff?

Wrong.

Roughly stated a currencies value is a reflection of it's outlook and (relative) economic strength vs another countries currency (Chinese Renminbi/Yuan, Canadian Dollar, the Euro, etc).

If the US Dollar is "weak" it means investors are buying Euros or Yen or Yuan instead, believing those countries to have more positive economic conditions in the future. This cheapens the dollar and boosts the other currencies (the US Dollar has to be sold and the other currency bought; supply/demand, Economics 101)

What this means to you: I had a cost of goods increase effective December 1 from AOR (a Canadian company). One reason for the increase is the US Dollar is much weaker (vs the Canadian Dollar) now than last year.

So, AOR has to collect more US dollars (from me and you) to make the same profit once it is converted to Canadian Dollars (they can't spend US Dollars in Canada!).

As the US Dollar continues to fall (I believe it will), cost of all imported goods will rise.

Especially Chinese goods.

China has a pegged currency exchange rate, meaning unlike nearly all other nations, it does not freely float in value vs other currencies. The Chinese government controls the currency value.

Who cares? Ha! You do sucker, because the Chinese economic miracle has been fueled by cheap exports. An undervalued currency means Chinese products have been dirt cheap to buy (by other countries).

Until now.

The vast majority of imported raw materials comes from...China. Now there are two choices, raise prices to make the same profit, Or quality is sacrificed by either the supplier or distributor.

I will not sacrifice quality. Relentless Improvement is the only business that I know of to conduct, and make available in real-time, 3rd party material analysis. You might buy it for less somewhere else, but what exactly are you buying?

Bottom line, expect higher prices from a lot of businesses in the coming months and years.

Change is the only constant.
Pete