The declining value of the US dollar should allow PC vendors to offer bargains to European consumers, according to a leading economist.
The US currency has suffered from a decision by the Federal Open Market Committee to lower the federal funds rate 50 basis points to 4.75%. That's the rate financial institutions charge each other for overnight loans and it has a big impact on overall interest rates in a country.
The lower rate hurts the dollar because it causes investments to flow out of the US to find higher interest rates elsewhere, such as Britain where the rate is 5.75%, or Australia where it's 6.5%. The Fed said it reduced the rate to stave off credit problems associated with the bad-loans crisis in the US housing market.
A negative side affect for people in the US is that the falling currency is leading to higher prices for some commodities. The price of oil, for example, rose to a record $83 a barrel on Thursday, largely due to the cut in the federal fund rate, according to Robert Mundell, professor of economics at Columbia University and the 1999 winner of the Nobel Memorial Prize in economics.
Oil is traded globally in US dollars, but oil traders have made the price per barrel higher to offset the declining value of the US dollar. Higher oil prices raise fuel costs for consumers and potentially mean higher prices for air tickets and shipping rates.
The situation is far different for computer components, despite the fact they are also bought and sold in US dollars around the world. While oil producers have the power to raise prices in order to compensate for the weaker dollar, makers of computer parts, for which the market is far more competitive, do not have the same type of leverage.
The good news for people in the euro zone is that the euro rose to a record high against the dollar after the Fed's rate decision, so people in countries that use the euro should see bargains for a number of IT items. Currency traders bid the price of the euro to $1.41 on Friday, up from $1.37 at the beginning of September and $1.39 a day ahead of Tuesday's Fed rate cut. By comparison, the euro bought only $0.82 at its low point in October 2000.
The stronger European currency should bring more bang for the buck, so to speak, unless retailers take advantage of better exchange rates to boost their own profits.
For Americans, the news isn't bad. Despite the decline in the currency, component prices probably won't rise, Mundell said, because most of the computer industry is located in the US and Asia.
"Asia is a US dollar area," he said, during a briefing with reporters in Taipei today. Computer components are bought and sold in the US currency, and nations in the region generally tie their currencies to the US dollar. In addition, manufacturers are constantly working to lower costs, and these reductions are valued in US dollar terms.
One example of a computer component traded globally in US dollars is DRAM, for which prices have fallen dramatically this year.
The contract price of the most widely used DRAM, 512Mb DDR2 chips that run at 667MHz, dropped to $1.75 each as of Thursday, down 70.5% since the beginning of the year, according to DRAMeXchange Technology, which runs an online trading site for the chips.
The chip prices are falling because producers are churning out too many chips and causing a glut on the market.