The labor force participation rate, not just the unemployment number is often the best indicator of labor market strength. American exports tend to increase when purchasing American-made items becomes less expensive than buying from other countries. In contrast, exporters face greater challenges selling American-made products overseas when the value of a dollar strengthens against other currencies.
But First: Why is the Strong vs. Weak Dollar Debate Happening?
It also helps compensate for rising inflation by keeping purchasing power from dropping too much. Expenditures are paid in U.S. dollars as those dollars fall but revenues are received in stronger currencies. However, the downside is that U.S. companies that sell goods to foreign customers suffer because, relative to a weaker currency, our goods and services cost more.
- During periods of an increasing rate of inflation, purchasing power goes down.
- The U.S. dollar hit its highest levels in years shortly after Donald Trump won the presidential election in November 2016.
- The currency market experiences continual demand from banks, investors, and speculators.
- It also helps compensate for rising inflation by keeping purchasing power from dropping too much.
- Since the U.S. dollar is a floating currency, its value will vary according to market trading trends.
Traveling Abroad Is Cheaper
But you’re probably not an economist — so, with sleeves rolled down, you might be tempted to accept the oversimplified “strong equals good” notion that’s been around for more than two decades. Investors can also profit from a falling U.S. dollar through the purchase of commodities or companies that support or participate in commodity exploration, production, or transportation. Economists still disagree about the exact reasons for this divergence but there’s little doubt that taking advantage of the relationship provided investment opportunities. Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom. Join the 70,000+ businesses just like yours getting the Swoop newsletter.
Impact on Multinationals
Multinational companies are vulnerable to the effects of currency fluctuations on the spending power of their customers abroad. A historically strong U.S. dollar may cause stock investors to look into companies that make their money mostly or entirely in their home countries. weak dollar definition A weak dollar refers to a downward price trend in the value of the U.S. dollar relative to other foreign currencies. The most commonly compared currency is the Euro, so if the Euro is rising in price compared to the dollar, the dollar is said to be weakening at that time.
Strong vs. Weak Dollar
Let’s say that one euro buys $1.54 compared to a prior rate of $1.35 in a falling dollar environment. The company therefore benefits from this translation gain with higher net income as you translate the subsidiary’s results into the falling U.S. dollar environment. When a large trading partner like China artificially keeps its currency weak, it hurts the balance of payments, meaning its goods are cheaper than domestically produced products.
Though a short-term boon for the consumer, a weak currency of a foreign competitor means U.S. manufacturers have trouble competing. A strong dollar is an exchange rate that is historically high relative to another currency. The terms “weak dollar” and “strong dollar” are used to describe the current value of U.S. currency in comparison to other major currencies. A strong dollar bolsters the dollar’s status as a world reserve currency. While some countries, including Russia, Iran, and China, have questioned the status of the U.S. dollar as the de facto world reserve currency, a strong dollar helps keep its demand as a reserve high.
The tech sector tends to have the greatest exposure when the dollar is strong. For example, more than 95% of chip maker Qualcomm’s sales are outside the U.S. The terms strengthening and weakening have the same context in that they each refer to the changes in the U.S. dollar over the period of time. A strengthening U.S. dollar means that it now buys more of the other currency than it did before. A weakening U.S. dollar is the opposite – the U.S. dollar has fallen in value compared to the other currency – resulting in fewer U.S dollars being exchanged for the stronger currency.
Perhaps the most interesting example is the fate of the British Pound as Brexit neared. The British pound (GBP) was a stable currency but the vote to leave the European Union set the pound on a very volatile path that saw it weaken in general as the process of leaving plodded along. A temporary weak phase in a major currency provides a pricing advantage to its exporters but this advantage can be wiped out by other systematic issues. Soaring inflation and economic uncertainty following the Brexit vote led to a loss in confidence in the pound. That could translate to a huge boost in the bottom lines for U.S.-based businesses like Intel, which makes as much as 80% of its annual revenue outside of the U.S., according to Gendreau. And if you’ve ever planned an international trip, worked for a car manufacturer, purchased pretty much any electronic device or even bought a tank of gas, it’s definitely worth understanding.
The FASB has determined that the primary currency in which each entity conducts its business is referred to as “functional currency.” The functional currency may differ from the reporting currency, . Translation adjustments may result in gains or losses in these cases which are generally included when calculating net income for that period. Conflicts over currency can (and have) led to trade wars where import tariffs are imposed in response to artificially weak currency of major trading partners. Trade wars are generally counterproductive, but sometimes politicians are more concerned with what plays well rather than what it means for the overall economy. Learn more about the impact of a strong versus weak dollar when it comes to jobs. A strong U.S. dollar could be bad for large-cap multinationals because it makes American goods more expensive overseas.
When the economy is thriving and the value of the dollar is rising along with it, that’s generally a good thing. But it’s possible for the dollar to rise too fast for the rest of the economy to keep up. First, consider increasing savings to take advantage of a rising rate environment. A high-yield savings account or CD account may be a safe and attractive choice for growing cash savings when rates climb. In fact, some countries may intentionally devalue their currency to make themselves more competitive economically, particularly following a downturn or recession.
