Tom: Good morning, Mellody. You are here today to explain what the strong dollar means.
Mellody: Good morning! I am, Tom. Over the past few months, you have probably heard people talking about the strong dollar – and for good reason! The dollar has been gaining ground against all major currencies. The euro dropped to a valuation of $1.10 last week, the lowest level in eleven and a half years, and a dollar buys 25% more yen than it did a year ago. This surge in our currency’s value is big enough to change the economic interactions between the world’s largest economies, and it will have ripple effects for countries, companies and individuals.
Tom: A strong dollar is simply a better exchange rate, right?
Mellody: That’s right, Tom. The terms weak dollar and strong dollar are used in the foreign exchange market to describe the relative value of the U.S. dollar against other currencies. As the dollar increases in value compared to another currency, it buys more of the other currency than it did before. And this has impacts in many sectors of the economy.
And the reason the dollar is doing well against other currencies is really straightforward. The American economy is doing very well relative to the rest of the world’s economies. In recent years we have seen Europe and Japan struggle to emerge from the global economic downturn. Developing economies like Brazil and Russia are experiencing instability, and China is slowing fairly dramatically, all while the U.S. is seeing consistent growth. Because of this, you have greater demand for the dollar.
Tom: What is the overall impacts of this?
Mellody: A stronger dollar has some benefits and some drawbacks. One big area where we are certain to see big impacts is trade. American companies that export their product overseas will take a hit, because a strong dollar makes their products more expensive, so their price competitiveness has fallen. On the other hand, companies that import components should see benefits, as should retailers who are importing their wares. A strong dollar means that products made outside of the United States will be cheaper in relative terms than they were before.
Tom: Will this have an impact on the market?