What does a Strong or Weak Dollar Mean?
The Dollar has been all over the news recently since it is currently extremely weak versus other world currencies. But what does that really mean? When I was new in the industry, I spent years hearing statistics on how the dollar was performing, but never had a clear grip on what that meant for the U.S. Stock market, foreign investment, and our economy as a whole. In this entry, we will discuss how the status of the dollar affects our markets and what it means to the everyday investor.
Shouldn’t a Strong Currency be good for the Home Country?
At virtually every opportunity, government officials stress the importance of keeping the U.S. dollar strong against its peers. Last week, while in Japan, Treasury Secretary Geithner stressed to Japanese leaders that maintaining a strong dollar was vital for the U.S. economy going forward.
The most confusing part of the currency market, though, is that a stronger currency does not always mean good things for the home country. For example, the Japanese yen has had gains of at least a third against the dollar just since 2007. However the yen’s movement has only made life more difficult for Japan’s exporters. Many analysts on the street expect Japanese companies like Honda to post a loss for 2009. Typically, when a country’s currency falls, they gain a competitive advantage for their exports.
It would also make U.S. goods more attractively priced, which could help mainstream exporters join in on what cultural icons like what Coca Cola (NYSE: KO) and Home Depot (NYSE: HD) are already doing: getting into emerging markets like China in a big way.
How a Weaker Currency Affects Imported Goods
Now before you let that information sink in, there is another aspect to the export story. A weaker currency makes it more expensive for people to purchase goods from another country. Recently, oil has been the best example of this occurrence; although ExxonMobil and Chevron have posted obscene profits recently, consumers felt the pinch at exactly the wrong time, lending a hand to the problems that helped to create the current financial crisis.
How a Weaker Dollar Affects the Trade Deficit
A weak dollar swings both ways in how it affects its home country. For example, the United States has a mammoth trade deficit, meaning that we import much more than we export. A weaker dollar, in theory, would reduce the huge trade imbalance that the U.S. currently has. However, for things like oil and gas, where demand pretty much stays constant when prices move dramatically, a weak dollar can actually have a derogatory impact on the trade deficit. As long as consumers rely on importing certain necessities, a weaker dollar may cause much more harm than good.
When is a Weak Dollar Good?
The bottom line is that while a strong dollar is important, we want to make the dollar weaker against the country or market that many believe will be our primary economic rival in the 21st century. With all of the conflicting information out there, I can definitely see why everyone is confused.
