So we all know how important the US Dollar is to the global economy, but I want to get my head around exactly what its impact is.  Too many times I’ve seen an anchor or talking head on CNBC go on about a strong or weak dollar.  Somehow that strengthens the point they’re trying to make…but why?!  Well here it is simply put…

When the dollar is ‘weak’ it can be exchanged for less foreign currency.  Its buying power is weaker.  Therefore people and businesses wanting to get buy things internationally get less for their US dollars.  The things they want to purchase get more expensive when the dollar gets weaker.  The impact of a weak dollar on holders of it is difficult, however a weak dollar brings increased interest from holders of other foreign currency.  For example lets say the USD gets weaker up against the euro (EUR).  So the German chocolates from Belzig we want to order with our USD just got more expensive.  Chances are we’re going to rethink our purchase and likely keep our money.  Although this may not be a major factor, but the result is more money staying inside the borders of the US. This means there is more money to be spent within the US, which we all know, consumer spending strengthens our economy.  So in that regard a weaker dollar may strengthen the US economy.  However that is not the main positive impact of a weaker USD.

Things purchased internationally with get more expensive, but conversely things purchased with foreign currency in the US gets cheaper.  For example’s sake lets say US$2 exchanged for €1.  Then the USD got weaker and now $3 exchanges for €1.  More dollars for the same euros…those chocolates just got expensive.  But if you look at it again, the Euro just got stronger.  The same €1 that got $2 now gets $3.  Its buying power increased which will attract individuals and businesses to buy things from the US.  In turn that strengthens the US economy and gives it an opportunity to grow.

A weaker dollar means less USD’s being exchanged for foreign and more foreign currency being exchanged for USD.  The same is tre for a stronger USD.  Buying things around the world becomes more attractive and the products selling for USD’s become less attractive to foreign currency holders.  A stronger dollar means more USD’s being exchanged for foreign currency and less foreign currency being exchanged for USD’s.  I’m glad I finally wrapped my head around this and that talking head can go on and make sense the next time I listen!

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