You have probably heard the terms “strong dollar” and “weak dollar”-- but what do they really mean? When the U.S. dollar is strengthening, it can buy more of another currency than it did when it was weaker. The strength of the dollar can be affected by many factors such as supply and demand, the general strength of the economy, market sentiment and geo-political events. For example, the American dollar is seen as a global “safe haven” and tends to strengthen, due to increased demand, during times of global turmoil. A strong dollar can be positive or negative, depending on your point of view. Following are some pros and cons of a strong dollar:
The U.S.’s terms of trade with the world are improved. This essentially means that comparatively speaking the U.S. will have greater purchasing power than our trade partners.
It is cheaper for U.S. residents to travel abroad because a strong dollar will have
more buying power than a weak dollar.
Likewise, foreign-made imported goods are cheaper for Americans.
Exports suffer because it becomes more expensive for foreigners to buy American made products. American goods cost more overseas when the U.S. has a strong dollar.
With Americans consuming more imports, American demand for domestic products also suffers.
American tourism is negatively impacted because it becomes more expensive for foreigners to vacation in the U.S. Travelers to the U.S. will also lose money when they exchange their currency for dollars.
All of the above affect the profitability of American companies, employment, etc. Individually, the effects of a strong dollar will depend on our consumption habits, preferences, geographical location, and the conditions of our industry of employment. The net effect of the pros and cons of a strong dollar for our country as a whole largely depends on the state of the economy, and where we are in the economic cycle at any given time.
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