Weak Dollar

What is a weak dollar?

What does it mean when someone says "weak dollar"? The dollar compared to other currencies such as the euro, yuan, yen, swiss franc is worth less. The weak dollar can be exchanged for a small or decreasing amount of foreign currency.

Since a majority of items bought and sold in the United States are produced abroad, a weak dollar can have harmful effects.

Weak dollar's effects

Strong precious metals. Since the dollar is worth less, precious metals, such as gold, become sought after.

Exported items are cheaper in other countries (where the dollar is weak). This means the U.S. produces more products to export. The trade deficit should go down (trade deficit: we import more than we export).

Imported items are expensive. Foreign nations selling us their products are more expensive for us to buy.

What causes a weak dollar?

Cutting interest rates.

Inflation. The dollar is worth less as inflation increases.

Printing and creating more dollars than necessary. The more dollars there are, the less each one is worth.

Policy makers have felt it critical, in part, to lower the prices on U.S. assets to get foreign investors to start buying again and inject liquidity back into the financial system.

Currency links

If a foreign country links its currency value to the dollar, strictly speaking, the change in dollar will have no effect on the other currency because they always have the same ratio. For example, if the Yuan is tied to the dollar at 8.28 to 1, then if the dollar goes down so does the yuan by an equal amount. The foreign country then competes with the U.S. on labor costs, taxes, and other government interference.

Deleterious effects of a weak dollar

Since the U.S. government spends more than it takes in in taxes, the deficit grows (about 1 billion dollars a day). This means the government must fund its deficit spending by selling debt (government bonds) to others. If the interest rate is low, no one will buy it. If that happens, the government buys back the debt itself (called monetizing the debt). This further weakens the dollar.

Dollar Investments

UUP - ETF for U.S. dollar index bull. Tracks the Deutsche Bank Long US Dollar Futures index.

UDN - ETF for U.S. dollar bearish (dollar will get weaker). Tracks the Deutsche Bank Short US Dollar Futures index.

Summary of the weak dollar

  • U.S. export manufacturers like it
  • U.S. domestic manufacturers hate it
  • Foreign exporters hate it
  • Politicians like it
  • International travelers like it

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