How Exchange Rates Affect Savers' Bottom Lines

08.19.08 | Work | 0 Comments | by Fred Siegmund

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Last spring, the Washington Post ran an article entitled "Foreign Buyers Flock to DC Office Market." The article explains that foreign investors bought 10 times as much commercial property in the District in 2007 as they did in 2006, with 2008 looking like 2007.

Buyers from Europe, Australia, Asia Pacific and Latin America have bid up prices to a record $867 a square foot.

Washington is an office-based economy with a stable or growing job base, so it is good to have the construction industry creating jobs and making way for even more office jobs. It would be better if the savings and savers financing the buildings were Americans.

Foreign nationals have so many dollars to invest because Americans buy so much oil and import so many products from Europe, China and other countries abroad. In 2001 and 2002 Americans paid around a dollar for a Euro, Europe's universal currency. By 2005 they had to pay around $1.35. Today, it is around $1.57.

A bottle of French wine that was $10.00 in 2002 now costs Americans $15.70. A higher price for wine makes it easy to see how higher exchange rates and a falling dollar value discourage consumption.

It might not be as obvious how higher exchange rates and a falling dollar value can benefit American savers. American buying abroad has supplied so many dollars to foreigners they are using their surplus in America's capital markets.

Some of it is loans but some of it is to buy America's assets like the office buildings mentioned above. It is sobering for real savers to see Americans trading assets like office buildings to pay for import consumption, but the devaluing dollar will begin to change that.

The devaluing dollar that limits American consumption will also limit the dollars foreigners have to invest in United States capital markets. If Americans have to rely more on its own savers, then savers can expect to earn higher interest rates.

Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com

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