14 Apr

Dollar Up, Euro Down, Yen Unchanged – Why Should I Care?

April 14, 2008

I’m sure way back in my Economics and Finance 101 classes (pre Euro implementation) my professors espoused with great vigor the academia perspective of what currency fluctuations would mean to the United States and world economies.  My response to this lecture was to thank them for the short nap.  Fast forward to today’s nightly news and the constant comments regarding the weakening dollar and I wish I would have paid a little more attention.

So what does all this potentially mean for the U.S. Economy and specifically you?  The quick answer is that since there are two sides to every coin (no pun intended) a weak currency has both its advantages and disadvantages.

The terms strong and weak, rising and falling, strengthening and weakening are relative terms in the world of foreign exchanges indicating a change in position from a previous level.  When the dollar is weakening, its value is dropping in relation to one or more currencies, and will thus buy less units of a foreign currency than previously.

Benefits of a Weaker Dollar

  1. Increased Exports – U.S. companies find it easier to compete with foreign- made goods and have the ability to raise their prices accordingly.  This translates into higher margins, more domestic jobs, and increased consumer spending.
  2. Foreign Investment – Foreigners flush with cash find relative bargains in the U.S. equity, bond, and real estate markets.  These inflows help support the financial and housing markets.
  3. Increased Tourism –Tourism represents a big part of the U.S. economy and a weaker dollar means that more foreign tourists can afford to visitMidway Village.  More tourism is always good for the economy.

Disadvantages of a Weaker Dollar

  1. Foreign Goods Cost More – It takes more dollars to purchase the same amount of foreign currency so the Canadian drugs or the Toyota Camry is now more expensive.
  2. Typically Higher Inflation – As the prices of goods rise (think imported oil) these higher costs eventually translate into inflation.
  3. Foreign Travel More Expensive – That long awaited trip to Europe or Australia will now cost you more, not because you have a nicer room, but simply due to the currency exchange rate.

The above examples indicate why the currency fluctuation of the dollar is important to all of us, whether it’s our employer who is exporting goods overseas, our weekly trip to Target, or the all important jaunt to our travel agent.  Happy travels.

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