Weak Dollar: What it Means, How it Works

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

They can include a high rate of inflation, chronic current account and budget deficits, and sluggish economic growth. Economic concerns aside, you may be more focused on how a weak dollar could translate to your ability to buy the things you need and want. Items that tend to be more susceptible to the impacts of a weak dollar include commodities, gasoline, and travel. There is an advantage for the economy as a whole, however, when the dollar is weak. Items exported from the U.S. become cheaper, making it easier for companies that sell overseas to remain competitive in the marketplace. All of these factors are connected and interact with one another in different ways to influence the relative strength or weakness of the dollar.

How Can I Follow the Value of the U.S. Dollar?

In the U.S., the Financial Accounting Standards Board (FASB) is the governing body that mandates how companies account for business operations on financial statements. In these cases, translation adjustments may result in gains or losses, which are generally included when calculating https://www.fx770.net/ net income for that period. Currencies can also be weakened by domestic and international interventions. China’s devaluation of the yuan in 2015 followed a long period of strengthening. The imposition of sanctions can have an immediate effect on a country’s currency.

A weak currency refers to a nation’s money that has seen its value decrease in comparison to other currencies. Weak currencies are often thought to be those of nations with poor economic fundamentals or systems of governance. A weak currency may also be encouraged by a country seeking to boost its exports in global markets. Demand for U.S. dollars causes it to strenthen in relation to other currencies. The currency market experiences continual demand from banks, investors, and speculators.

A strong dollar is an exchange rate that is historically high relative to another currency. While there’s nothing consumers can do to directly influence the strength or weakness of the dollar, there are some remedies for downplaying its financial impacts. Taking advantage of currency moves in the short term can be as simple as investing in the currency you believe will show the greatest strength against the U.S. dollar during your investment timeframe. You can invest directly in the currency, currency baskets, or exchange-traded funds (ETFs).

The Upside Of A Weak Dollar

The terms “weak dollar” and “strong dollar” are used to describe the current value of U.S. currency in comparison to other major currencies. 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.

1. A weak currency refers to a nation’s money that has seen its value decrease in comparison to other currencies.
2. The Federal Reserve works to equalize such influences as much as it determines to be prudent.
3. Trade wars are generally counterproductive, but sometimes politicians are more concerned with what plays well rather than what it means for the overall economy.
4. American exports tend to increase when purchasing American-made items becomes less expensive than buying from other countries.
5. When U.S. exports become more competitive on the foreign market, then U.S. producers divert more resources to producing those things foreign buyers want from the U.S.

Though a short-term boon for the consumer, a weak currency of a foreign competitor means U.S. manufacturers have trouble competing. Learn more about the impact of a strong versus weak dollar when it comes to jobs. The strength of the U.S. dollar rose to a 20-year high in 2022 but it had weakened by the end of August 2023.

Tourism and Trade

However, just four currencies are used as benchmarks and they are routinely compared to each other as a measure of relative strength or weakness. They are the British pound, the Japanese yen, the euro, and the U.S. dollar. A nation which imports more than it exports would usually favor a strong currency. However in the wake of the 2008 financial crisis, most of the developed nations have pursued policies that favor weaker currencies.

Conflicts over currency can (and have) led to trade wars where import tariffs are imposed in response to artificially weak currency of major trading partners. Trade wars are generally counterproductive, but sometimes politicians are more concerned with what plays well rather than what it means for the overall economy. It can lead to manufacturers moving plants to foreign countries with lower costs to remain competitive. For example, when the dollar was overvalued in the late 1990s and early 2000s, the manufacturing sector lost 740,000 jobs. When a large trading partner like China artificially keeps its currency weak, it hurts the balance of payments, meaning its goods are cheaper than domestically produced products.

When U.S. exports become more competitive on the foreign market, then U.S. producers divert more resources to producing those things foreign buyers want from the U.S. But policy makers and business leaders have no consensus on what direction, a weaker or stronger currency, is best to pursue. The weak-dollar debate has become a political constant in the 21st century. 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.

Understanding the Strong Dollar

A weaker dollar, for example, could allow U.S. factories to remain competitive in ways that may employ many workers and thereby stimulate the U.S. economy. However there are many of factors, not just economic fundamentals such as GDP or trade deficits, that can lead to a period of U.S. dollar weakness. For example, if one of the U.S.’s trade partners is experiencing its own weak currency cycle, that can result in lower prices for the goods that the country produces. The side effect is that it becomes more difficult for domestic manufacturers to compete with those reduced prices. A weak dollar means our currency buys less of a foreign country’s goods or services.

Domestic Companies Insulated From the US Dollar

“Weak dollar” does not sound good — particularly if you have a bank account full of dollars. First, consider increasing savings to take advantage of a rising rate environment. A high-yield savings account or CD account may be a safe and attractive choice for growing cash savings when rates climb. In fact, some countries may intentionally devalue their currency to make themselves more competitive economically, particularly following a downturn or recession.

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. 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 tech sector tends to have the greatest exposure when the dollar is strong.

A weak currency may help a country’s exports gain market share when its goods are less expensive compared to goods priced in stronger currencies. The increase in sales may boost economic growth and jobs while increasing profits for companies that are conducting business in foreign markets. Understanding the accounting treatment for foreign subsidiaries is the first step to determining how to take advantage of currency movements. The next step is capturing the arbitrage between where goods are sold and where goods are made. As the United States has moved toward becoming a service economy and away from a manufacturing economy, low-cost provider countries have captured those manufacturing dollars. U.S. companies took this to heart and began outsourcing much of their manufacturing and even some service jobs to low-cost provider countries to exploit cheaper costs and improve margins.

On the other hand, a weak dollar can signal an economic downturn, rising inflation, or both. The term weak dollar is used to describe a sustained period of time, as opposed to two or three days of price fluctuation. Much like the economy, the strength of a country’s currency is cyclical, so extended periods of strength and weakness are inevitable.