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.
Why a Strong Dollar Could Be Bad for Investors
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.
Yes, the Dollar Can be “Too Strong”
Because local prices in foreign countries are not significantly influenced by changes in the U.S. economy, a strong dollar can buy more goods when converted to the local currency. If you’re looking for a way to gauge the dollar’s strength, one of the best ways is to watch the Invesco DB U.S. Dollar Index Bullish Fund (UUP). A description of the U.S. dollar when it is worth less relative to other foreign currencies.
World’s Weakest Currency
In contrast, low economic growth may result in deflation and become a bigger risk for some countries. Consumers may postpone spending and businesses may delay investing when they begin expecting regular price declines. A self-perpetuating cycle of slowing economic activity begins and this will eventually impact the economic fundamentals supporting the stronger currency. Demand for U.S. dollars causes it to strenthen in relation to other currencies.
So if U.S. inflation increases and dollar strength matches it with a similar rise, the two might cancel each other out. Economic theory predicts that currency fluctuations will eventually revert to a mean since cheap foreign goods should increase their demand, raising their prices. At the same time, expensive domestic exports will have to fall in price as demand for those items declines worldwide until some equilibrium exchange level is found. ABC Corporation is a U.S.-based company that imports electronic components from Europe to manufacture its products. Due to a weak dollar, the exchange rate between the U.S. dollar and the euro has become unfavorable for ABC Corporation. The price of the yen goes up and the yen becomes a strong currency if most people convert their currencies into yen.
What do the terms weak dollar and strong dollar mean?
You may also consider investing in strong foreign currency ETFs or foreign- and U.S.-based companies that generate most or all of their revenue outside the U.S. These terms are used to describe the relative strength of the dollar against other foreign currencies at any given time. Where the dollar falls on this scale can have a direct influence on your purchasing power and how far your budget can stretch.
- It also makes it more affordable for international travelers to visit the U.S.
- On the other end of the spectrum, domestic companies are not negatively impacted by a strengthening U.S. dollar.
- That spending power also translates to cheaper foreign goods, such as electronics, imported food and sometimes even high-ticket items like cars.
- 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.
- ABC Corporation is a U.S.-based company that imports electronic components from Europe to manufacture its 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.
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.
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 weak dollar definition 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.
The Federal Reserve works to equalize such influences as much as it determines to be prudent. During a period of tight monetary policy, when the Federal Reserve is raising interest rates, the U.S. dollar is likely to strengthen. When investors earn more money from better yields (higher interest payments on the currency), it will attract investment from global sources, which may push the U.S. dollar higher for a while. Conversely, a weak dollar occurs during a time when the Fed is lowering interest rates as part of an easing monetary policy.
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.
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