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Why a Strong Dollar Matters to You

(tenaciousme)

A statement we frequently hear from economic analysts is that America needs a “strong dollar.” And most of the time, the non-economically savvy segment of the population blankly nods in agreement. Lacking a deep understanding of why a strong dollar is beneficial (or even what a strong dollar means), most people nevertheless prefer a strong dollar to a weak one. However, the words “strong” and “weak” are the source of much confusion on this issue. In virtually every other area of life, strength is categorically, universally preferred to weakness. Using such language to describe fluctuations in the value of a currency invests emotional meaning into the situation, implying that a strong dollar is always preferable. In fact, the strong dollar/weak dollar debate is more complicated than it initially seems to be. Most experts, for instance, agree that a strong dollar (as commonly defined) is better in a normal, prosperous economy. Yet the very same experts – with data and convincing arguments – contend that a “weak” dollar can actually accelerate recovery from a recession, such as the one we find ourselves in today. Naturally, both of these positions require a firm grasp of both what a strong and weak dollar actually means, and why each of them lead to different outcomes depending on the state of the economy.

Today, we’ll address the strong dollar/weak dollar debate into perspective and explain what each of them means for you.

Strong & Weak Dollars Defined

For those who are not already aware, let’s define what a strong dollar actually means. Very simply, a strong dollar is one that, “…can be increased for a large or growing amount of foreign currency”, according to InvestorWords.com. Typically, a strong dollar is seen as a good thing because it means American citizens and businesses can get more foreign goods and services for the same amount of money. An American citizen could bring $1,000 to France, for example, and buy more there than she could here. This matters because imports are usually paid for in the currency of the country doing the importing. Consequently, America as a whole tends to import far more goods and services than it exports for however long the dollar is stronger than the currencies of the nations we trade with.

(Photos8.com)

A weak dollar, as you may have gathered, is one that, “…can be exchanged for only a small or decreasing amount of foreign currency.” A weak dollar is usually seen as a bad thing because it does not stretch as far internationally as it once did. Indeed, the opposite is true: foreign currencies buy more of our goods and services than we can buy of theirs. But while imports are usually purchased using the importing nation’s currency, exports are paid for in the currencies of the exporting country. Therefore, a weak dollar has the ability to change the entire flow of trade that occurs when the dollar is strong. When the dollar is weak, America as a whole tends to export more goods and services than it imports.

Why They Matter to You

From the above discussion, it may look like a strong dollar is always most desirable. But as we alluded to earlier, many experts disagree with that conclusion. A case in point is Bob McTeer of DailyMarkets.com. “If I had to choose with no qualifications”, McTeer writes, “…I’d choose the strong dollar.” Among his reasons are the fact that a strong dollar “…benefits consumers by holding down the price of imports and keeps the pressure on producers and exporters to keep costs down and productivity up.” McTeer also wisely points out that a strong dollar attracts foreign investment more readily. In the long term, he concludes, “…a strong dollar is good for our standard of living.” During a recession, however, McTeer’s analysis changes.

While a naturally stronger dollar (that is, a dollar whose value rises because demand for American imports rises) is still beneficial, a dollar made stronger by political fiat and interference can actually slow an economic recovery by, “…reducing demand for our exports relative to our demand for imports.” The consequences are potentially disastrous as far as recovery is concerned. The deficit of trade that results from our artificially strong dollar can “…divert demand to our trading partners”, thereby diminishing demand for American products and services at a time when that is, by definition, the very thing we need for a true recovery. Of course, McTeer concedes that being in favor of a “weak” dollar (even within certain tightly circumscribed conditions and circumstances), “…still doesn’t seem right” to many observers. To think about the issue and the forces at work more clearly, he suggests substituting the word “competitive” for “weak”, which eliminates the negative emotional connotation.

(kevindooley)

MSNBC also reported in February 2010 that a resurgent US dollar could be, “…the latest threat to recovery” from the current recession. While the dollar, “…surged to an 8-month high against the euro, and is also rising against other major currencies”, that could actually, “…hurt exports, which are big contributors to the US economy right now.”As a direct result, American businesses will pay more to sell their products overseas while, “…imports here will be cheaper – good for consumers, but bad for businesses.” The Peterson Institute for International Economics (a nonpartisan research group) breaks it down even more specifically. For every 1% increase in the value of the dollar – averaged against major foreign currencies – US exports are reduced by, “…about $20 billion annually”, which, “…destroys some 150,000 jobs.” Like Bob Mcteer, MSNBC agrees that supporting a weak (or competitive) dollar may not intuitively feel right, but that during a recession, stronger does not necessarily mean better.

The Takeaway

To recap, we have learned that “strong” and “weak” dollars are not categorically good or bad for America as a whole. Certain segments of the economy are hurt or helped by either, depending on whether we are in a recession or not. Furthermore, during recessions, a strong case can be made that a “weak” dollar provides a needed boost to the sagging economy by promoting increased exports of our goods to other countries. Largely, the words “strong” and “weak” obscure the deeper meaning of the issue, which is whether (and when) it is better for our currency to be worth more or less than foreign currencies.