In the interest of not spreading fake news and unsubstantiated claims, let’s just imagine for a moment that as reported by some sources, President Trump was in fact pondering various economic issues facing the country at 3am and was actually curious – Is a strong dollar good or bad for the U.S. economy? Actually Mr. President, that’s a great question.
Forget that it’s 3am, forget that he called his National Security Advisor, not an economist or a Charted Financial Analyst, and forget that in a discussion with the Wall Street Journal he made mention of the impact of the strong dollar on our ability to compete internationally. Let’s forget all of the politics and just look at the question posed through an economic lens.
Is a strong dollar good or bad for the U.S. economy?
First, let’s work through an example of a strong dollar using wine as an example.
Imagine that you had a great bottle of French Bordeaux wine on your honeymoon in Paris and you’d like a bottle of it to celebrate an anniversary back in the States. Let’s say that that bottle of French Bordeaux wine costs €50 Euro
In the summer of 2008 on your one year anniversary the exchange rate was:
$1 Dollar for €.667 Euro
So, that €50 Euro bottle of wine cost $75 (€50 * $1 / € .667)
Now here we are in February of 2017 and on your ten year anniversary the exchange rate is:
$1 Dollar for €.940 Euro.
The dollar is stronger, it has appreciated, your dollar buys more Euros than it used to.
So, say you want to celebrate with that same lovely bottle of French Bordeaux.
OK, that €50 Euro bottle of wine now cost $53.19 (€50 * $1/€ .94)
This is what it means for the dollar to strengthen. A strong dollar makes imports cheaper.
Did the Bordeaux maker get less money somehow? No, he still got his €50 Euro in each case, but the American consumer who bought it paid far less money for the exact same product because of the exchange rate difference.
So one thing that we can say definitively is that when the dollar strengthens, imported products, like French wine, electronics from Asia and cars from Germany are cheaper for American consumers. That’s good for consumers of imports and it makes our dollar go farther. Similarly, American businesses that use imports as inputs to their manufacturing process have lower costs when the dollar strengthens.
But, on the flip side, the opposite is true. That Frenchmen who is tired of his local Bordeaux and wants a California Cabernet isn’t as happy. His $50 bottle of California Cabernet went from Euro €25 to Euro €47. And again there was no impact to the producer, our winemaker in California got the same $50 in both cases.
Similarly, other goods and services foreigners buy that are imported from America from Levi’s to Air Jordan’s to John Deere tractors to Boeing planes are all more expensive. So as the President correctly pointed out, a strong dollar makes our products more expensive in foreign markets and that in turn generally makes our companies less competitive in the global marketplace. If our companies are less competitive, they hire fewer Americans and they invest less in R&D, which further constricts our economy.
So if your policy is to try and increase U.S. manufacturing jobs, you probably actually want a weak dollar so the goods we export are more attractive to foreigners, not less.
But then it gets complicated because after we look at the first order impacts, there are many other forces and factors, such as interest rates, trade imbalances, reserve currency speculation and even expected inflation that can all come into play and either support or alter the attractiveness of a strong dollar.
Suppose you have a strong dollar, but you feel it’s strong enough at the moment, but you’d also like to raise interest rates. Raising interest rates will likely increase demand for dollars and strengthen the currency even more. And that’s the crux of economics; there are always 2nd, 3rd and 4th order impacts and considerations that may not necessarily be consistent with your original intent. And that’s even assuming that the economists agree on what will happen in each of the scenarios.
So if you’re planning a big foreign vacation or have your eyes on a foreign automobile, you want a strong dollar. If you want U.S. companies to be as competitive as possible in a global marketplace, a weak dollar is probably better.
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