A weak dollar means American consumers must spend more dollars to buy the same imported goods but are a relative bargain abroad. A weakening dollar implies several consequences, but not all of them are negative. A weakening dollar means that imports become more expensive, but it also means that exports are more attractive to consumers in other countries outside the U.S. Conversely a strengthening dollar is bad for exports, but good for imports. For many years the U.S. has run a trade deficit with other nations–meaning they are a net importer. Americans using U.S. dollars can see those dollars go further abroad, affording them a greater degree of buying power overseas.
Understanding the Strong Dollar
Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
Traveling Abroad Is Cheaper
Foreign companies that do a lot of business in the U.S. and their investors benefit from a strengthening dollar. Multinational corporations with large sales in the U.S., which earn income in dollars, will see gains in the dollar translate to gains on their income statements and balance sheets. While there’s nothing consumers can do to directly influence the strength or weakness of the dollar, there are some remedies for downplaying its financial impacts. Economic concerns aside, you may be more focused on how a weak dollar could translate to your ability to buy the things you need and want.
What Causes the U.S. Dollar to Strengthen?
On the other end of the spectrum, domestic companies are not negatively impacted by a strengthening U.S. dollar. A strong U.S. dollar can be bad for multinational companies because it makes American goods more expensive overseas. If the U.S. dollar continues to appreciate, it could have a negative long-term impact because those overseas consumers will begin to turn away from American brands. The rial hit the skids as long ago as 1979 when the nation’s Islamic Revolution led many businesses to flee the country.
How Long Will the Strong Dollar Last?
More dollars are needed to buy the same amount of yen so the dollar becomes a weak currency. The dollar strengthens when interest rates rise, and international investors view it as a safe haven for maintaining and increasing value during turbulent economic times. In general, the strength and value of a currency depends on the demand for that currency.
- Much like the economy, the strength of a country’s currency is cyclical, so extended periods of strength and weakness are inevitable.
- A good historical example of such a divergence occurred during 2007 and 2008 as the direct relationship between economic weakness and weak commodity prices reversed.
- Essentially, a weak dollar means that a U.S. dollar can be exchanged for smaller amounts of foreign currency.
- The government collects less in taxes when citizens are working and earning less.
If the U.S. dollar continues to appreciate, then it could also have a negative long-term impact because those overseas consumers will begin to turn away from American brands. Travelers are particularly affected by the current weak dollar definition value of their home currencies. If an American travels to London when the dollar is strong, their dollars will stretch farther. Package tours become more or less affordable as the value of the dollar fluctuates.
The dollar/euro exchange rate must therefore be used when the company translates the subsidiary’s results to the reporting currency (the U.S. dollar). The impact of the rise or fall of the U.S. dollar on investments is multi-faceted. Investors should understand the effect that exchange rates can have on financial statements, how this relates to where goods are sold and produced, and the impact of raw material inflation.
However, you may be less informed as to what it means when the U.S. dollar is strong vs. weak. The dollar can get weak for lots of complicated reasons, economically and politically. Whatever the case, the Federal Reserve (a.k.a. “the Fed”) might step in to try to remedy the situation, like a currency Superman. For instance, they can raise interest rates, which would attract investors like bees to honey because of the prospect of higher yields.
Having insight into the influence that changes in currency values have on investments provides opportunities to benefit both in the short and long term, however. Investing in U.S. exporters, tangible assets, and appreciating currencies or stock markets provide the basis for profiting from the falling U.S. dollar. The functional and reporting currency will be the U.S. dollar if you invest in a company that does the majority of its business in the United States and is domiciled in the United States. Its functional currency will be the euro if the company has a subsidiary in Europe.
