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Is a “strong” dollar a good thing? President Donald J. Trump has said that it is not, and his words caused ripples throughout the economy. But what, exactly, was he talking about?
The subject of a strong or weak dollar gained (pun alert) currency after Trump, in a pre-inaugural interview with the Wall Street Journal, called the dollar “too strong.” He made the remark while he criticized China’s manipulation of its currency, the yuan, which Trump said boosted the dollar’s strength. Trump told the Journal (subscription required):
“Our companies can’t compete with them now because our currency is too strong. And it’s killing us.”
It is an unusual stance for a U.S. leader. “‘It’s pretty unprecedented to hear comments by a president or president-elect to support a weaker dollar,'” Randy Frederick, vice president of trading and derivatives at the Schwab Center for Financial Research, told USA Today.
Soon after Trump’s comments, the dollar’s value fell to its lowest level in a month. The stock market, too, felt the effect: “Trump sends shiver through stock market with shot across dollar’s bow,” a Dow Jones MarketWatch headline read.
What is a ‘strong’ dollar?
Before looking at who benefits from a strong dollar and who wins when the dollar is weaker, here’s a more basic question: What exactly is a “strong” dollar?
The short answer: A currency’s strength is a relative thing, measured against how much it buys relative to other currencies. Economists say the American dollar is strong when you can use it to buy more Chinese yuan, euros or Mexican pesos than previously. The more pesos you get for exchanging a dollar, the “stronger” the dollar is.
Currently, the dollar is strong indeed. Its value rose after Election Day (before falling after the Journal article) and, since 2014, the dollar has risen more than 25 percent compared with a “basket” of other currencies, according to USA Today.
Strong sounds good. And it is, in many regards.
“[M]any people view the dollar as a bit of a proxy for how the U.S. is performing overall, including the new administration,” says Franklin Allen, finance and economics professor at Wharton Business School. Too much appreciation, though, can dampen U.S. economic growth, the article adds.
Bottom line — it depends on your perspective. The dollar’s value can make you a winner or a loser, depending on how you earn — and spend — your money.
For example, the strong dollar is good for:
1. American consumers
For better or worse, cheap imported consumer goods have become an underpinning of the American economy. Being able to buy inexpensive goods made overseas — clothes, furniture, bedding, food and cars, to name a few examples — leaves us more money to spend on other things in our budgets. If the dollar weakens, you can expect the cost of all these imports to rise.
2. U.S. travelers abroad
Basically, importers (all retailers) and Americans who travel abroad benefit from a strong dollar.
3. The U.S. economy
“If you want to improve living standards for most Americans, a strong dollar is better,” writes Matthew Yglesias at Vox.
Cheap imports allow Americans to feel more affluent.
Also, some economists and investors say that a strong dollar encourages investment in high-quality U.S. bonds, which also helps boost the American economy.
4. Foreign companies doing business in the United States
Multinational companies also profit from a stronger dollar, as do their investors. That’s because their revenues from U.S. sales are earned in dollars. For example, according to Investopedia, “German pharmaceutical company Bayer has reported that each 1 percent appreciation of the dollar against the euro increases net sales by 260 million euros.”
Weak dollar winners
1. American manufacturers
Trump — in his concern about the strong dollar — is most likely thinking like American manufacturers, who make goods for the export market and suffer in a strong-dollar climate. According to Investopedia:
Domestic companies that do a lot of business abroad will be hurt. Companies that are based in the United States but conduct a large portion of their business around the globe will suffer as the income they earn from foreign sales decrease in value on their balance sheets. Investors in such companies are also likely to see a negative impact.
The cost of producing products made in the United States is paid in dollars, making them more expensive. What’s more, buyers abroad may hesitate to buy them with their cheaper currencies.