Thursday, July 3, 2008

Weak Dollar vs Strong Dollar

The weak U.S. dollar is helping to push oil and gasoline prices higher, making imported goods more expensive for Americans and overseas vacations more costly. At the same time, it's helped U.S. exporters.

If the dollar gains against other currencies, it is said to be strengthening. Its buying power increases relative to the other currencies. If its exchange rate declines, it is said to be weakening.

A strong dollar lowers the price to U.S. consumers of foreign products and services. That helps to keep inflation in check. U.S. consumers also benefit when they travel to foreign countries. It's usually a sign of a strong economy that is firing on all cylinders.

Weak dollar is basically the mirror image of strong dollar. U.S. manufacturers and other exporters benefit as American products become relatively cheaper. More foreign tourists can afford to visit the United States.

  • Exports are growing thanks to the weak dollar, which makes U.S.-made goods more affordable.
  • Industries with a strong international presence are benefiting the most.
  • Primary-product producers are seeing increased profits, since commodities are priced on the global market.

The dollar’s fall over the past several years is just cause for celebration by many domestic producers. Since its peak in 2002, the trade-weighted dollar has fallen by 25%, making U.S. goods much more competitive in an international market, while filling U.S. malls with Europeans on shopping sprees. The dollar has likely now finished its downward revaluation, and should stabilize going forward. This will allow the U.S. to enjoy the benefits of an affordable currency, while removing some of the risk in corporations’ long-term plans.
However if the dollar continues to sink, it could bring more inflation and even trigger a sell-off by foreigners of U.S. investments, making it harder to pay down the national debt and increasing risks of recession.

Richa Shukla

(Globsyn Business School)

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