RGJ:Raymond Gonzalez: Considering the strength of the U.S. dollar
One of the most misunderstood economic topics for the average investor is the strength of the U.S. dollar.
What is better -- a strong or a weak dollar? People in our nation become concerned when our currency weakens against others.
Let us look first at what happens when the U.S. dollar increases in value against all other currencies.
It is cheaper for U.S. corporations and businesses to import from foreign countries because the dollar is strong, which means foreign goods will cost less. Consumers benefit by saving on imported goods when they go shopping. For example, imported products purchased at your local Wal-Mart will be cheaper. A strong U.S. dollar will help U.S. citizens who are traveling abroad because they will be able to get more for their U.S. dollars. Items such as food, hotels, souvenirs and clothing all cost less.
On the other hand, a strong dollar will likely persuade foreign businesses to import less from the U.S. They may instead conduct trade with other countries with a weaker currency.
This would affect U.S. businesses that depend on foreign countries to buy their goods. They would see a decline in their sales and overall profit. In essence, the U.S. is more likely to see a reduction in exported goods when the dollar is strong. This would hurt American companies by reducing their international sales.
When foreign countries buy agricultural exports from a country with a weaker currency exchange rate than the U.S. dollar, the ultimate result is farmers have excess crop. This forces farmers to lower prices, putting them at a disadvantage because they are getting less for what they produce.
Of course, in the above scenario the U.S. trade deficit would increase since we are exporting less than importing.
When the U.S. dollar is decreases in value against other currencies, as we are seeing now, there are positives that many investors and people tend to forget.
When other currencies are strong, international businesses or firms purchase more products from U.S. businesses and corporations, which results in increased exports. This helps U.S. corporations increase sales, which can ultimately impact profits. Most importantly, when our U.S. businesses have an increased demand of their goods they need more people to produce these products, which lowers our unemployment rate. Additionally, one must remember that when our dollar is weak, foreign entities can pick up U.S. goods and services at a lower price.
