If you are relatively knowledgeable, you have heard the term “strong dollar” all your life, especially in recent years as the value of the dollar has steadily increased over the past 15 years or so. But if someone asked you to define a strong dollar, could you?
Here’s what you need to know about what a strong dollar means.
What does it mean when people use the term “strong dollar”?
Typically, when economists talk about a strong dollar, they talk about it in relation to other countries.
“A strong dollar means US exports are more expensive for foreign nationals to buy and US imports are cheaper for Americans to buy,” says Christopher Magee, professor of economics at Bucknell University, Lewisburg, Pennsylvania. .
What Makes the Dollar Strong?
“The dollar usually rises when the Fed pushes US interest rates higher because higher US interest rates make it attractive for foreign investors to buy US assets such as bonds,” says Magee.
But there are also a couple of other factors that make a strong dollar, notes Christopher Ball, an associate professor of economics at Quinnipiac University, in Hamden, Connecticut.
“Global investors want to move their money to the US to benefit from higher interest rates, a return on investment for them,” says Ball, who adds that the fact that the US is seen as the strongest economy and the safest place to invest in the world doesn’t hurt either.
Put it all together and you have a strong dollar.
What does the strong dollar mean for Americans and the economy?
It can mean both good and bad things, according to economists. That’s how.
A strong dollar can hurt American businesses. You wouldn’t think there would be any downside to a strong dollar. The problem comes when American companies try to sell to overseas markets. They may find that many residents are reluctant to buy their products because they are more expensive than what locals can buy if they buy goods or services manufactured or developed in their countries.
Or, if you are an American company competing with countries that import products to the United States, customers will be thrilled with the cheaper prices of international competitors. The strength of the US dollar could potentially harm your American business.
A strong dollar can be a boon to the American buyer. What is lousy for some American companies is fine and dandy for the American consumer. Because a strong dollar means foreign imports are cheaper and everyone likes a bargain.
“A strong dollar is good news for US consumers, who can pay lower prices when buying imported goods,” says Magee.
A strong dollar can be a gift for the American traveler. In the US, you may think your dollar doesn’t buy much. Ball says that inflation erodes the power of the dollar in the United States, as everything is generally 8% to 9% more expensive, he says, “we all feel that erosion in the value of the dollar.”
But that’s another story when you travel.
“In a global market, there’s a second dollar value that matters,” says Ball. “The international dollar value is what we can buy from overseas stores, manufacturers, and even restaurants and hotels if we travel.”
But the magic happens when you change your currency. Ethan Struby, assistant professor of economics at Carleton College in Northfield, Minnesota, explains it this way.
“If you imagine you are literally trying to acquire a few euros, right now you can get around 1 euro for $ 1, while in March 2008 it would have cost you about $ 1.50 per euro,” says Struby.
In March 2008, if you spent $ 5,000 on a vacation in Europe, you would trade it for around € 3,333. You will now spend $ 5,000 and will likely get around 5,000 euros to spend on your vacation.
What does the strong US dollar mean for other countries?
In the rest of the world, a strong dollar can also be a very good thing – or a bad thing – depending on your point of view.
Yeva Nersisyan is an associate professor and chair of the economics department at Franklin & Marshall College in Lancaster, Pennsylvania. He says that while Americans buy cheap import products and find travel deals, the opposite is often the case for other countries.
“Products made in the United States are now more expensive for them as they have to pay more in their home currency for the same product. So, all things being equal, we would expect a stronger dollar to encourage more imports to the US and discourage exports from the US to the rest of the world. “ Nersisian He says.
A strong dollar can be especially wonderful or painful for emerging countries, according to Charles Weise, an economics professor at Gettysburg College, in Gettysburg, Pennsylvania. Emerging countries are nations that have only recently begun to develop a strong middle class, such as Vietnam, Poland or Thailand, to name a few.
On the good side of the ledger? If the US is importing a lot of products from emerging markets, those emerging countries are doing a lot of business and making a good profit. It’s a good deal for everyone.
On the other hand, Weise says these emerging markets could take a lot of American debt.
“The stronger dollar means those debts are harder to repay,” Weise says. “The worst case scenario is a wave of debt crises like the one experienced in the world in the 1980s, which could end up causing problems for the US financial system as US financial institutions owe this money.”
Hopefully, of course, that doesn’t happen.
The bottom line about a strong dollar
How you feel about a strong dollar depends on where you are on the economic spectrum. However, there is a good argument that it is better to have a strong dollar than a weak one, at least right now. Many economists argue that a strong dollar can help reduce inflation.
As foreign goods become cheaper, American-made goods that compete with their foreign equivalents have many incentives to reduce their costs, according to David Gulley, a professor of economics at Bentley University in Waltham, Massachusetts.
“Cars, consumer electronics and a whole host of other products are becoming cheaper. So, our hard-earned dollars will go further, ”Gulley says.
But, overall, is a strong dollar good or bad?
“Overall, the strong dollar is neither good nor bad for the economy. It benefits some US citizens – consumers and businesses who rely on imported intermediate goods – and harms others, ”says Magee.