What is a Weak Dollar?
Let me explain what a weak dollar really means. It's when the value of the US dollar is on a downward trend compared to other foreign currencies. We often compare it to the euro, so if the euro is gaining value against the dollar, that's a sign the dollar is weakening. In simple terms, with a weak dollar, you can exchange one US dollar for less foreign currency than before. This makes goods priced in dollars or produced outside the US more expensive for you as a US consumer.
Key Takeaways
- A weak dollar means that the US dollar's value is declining compared to other currencies, most notably the euro.
- A weak currency creates both positive and negative consequences.
- The Fed usually employs a monetary policy to weaken the dollar when the economy struggles.
- Policy makers and business leaders have no consensus on whether a stronger or weaker currency is better for the US.
Understanding What a Weak Dollar Means
You should know that a weakening dollar brings several consequences, and not all of them are bad. It makes imports more expensive, but it also makes US exports more appealing to buyers in other countries. On the flip side, a strengthening dollar hurts exports but helps with imports. For years, the US has been running a trade deficit, meaning we import more than we export.
A country that imports more than it exports would typically prefer a strong currency. But after the 2008 financial crisis, most developed nations, including the US, have pushed for weaker currencies. A weaker dollar can keep US factories competitive, which might employ more workers and boost the economy. Keep in mind, though, that many factors beyond basics like GDP or trade deficits can cause dollar weakness.
We're talking about a sustained period here when we say 'weak dollar,' not just a couple of days of fluctuations. Currency strength is cyclical, just like the economy, so you'll see long stretches of strength or weakness. These can stem from things unrelated to US affairs, like geopolitical events, weather crises, overbuilding, or even population trends that pressure a currency over years or decades.
The Federal Reserve steps in to balance these influences as it sees fit. They use tight or easing monetary policy. In tight policy, when they're raising interest rates, the dollar tends to strengthen because higher yields attract global investment, pushing the dollar up. Conversely, when they're lowering rates in an easing policy, the dollar weakens.
Quantitative Easing
During the Great Recession, the Fed rolled out quantitative easing programs, buying up large amounts of Treasuries and mortgage-backed securities. This rallied the bond market and drove US interest rates to record lows. As rates dropped, the dollar weakened a lot. From mid-2009 to mid-2011, the US dollar index fell by 17 percent.
But four years later, when the Fed started raising rates for the first time in eight years, the dollar turned around and strengthened to a decade-high. In December 2016, with rates at 0.25 percent, the USDX hit 100 for the first time since 2003.
Tourism and Trade
Depending on what you're doing, a weak dollar isn't always a downside. If you're a US citizen planning a vacation abroad, it's bad news because things will cost you more. But for US tourist spots, it's good news since the country becomes a cheaper destination for international visitors.
A weak dollar can help shrink the US trade deficit. When US exports get more competitive overseas, producers here shift resources to make what foreign buyers want. Still, there's no agreement among policymakers and business leaders on whether we should aim for a weaker or stronger currency. This debate has been a political staple in the 21st century.
The Bottom Line
In the end, a weak dollar—where the US dollar's value drops against currencies like the euro—has both upsides and downsides. You might pay more when traveling abroad, but the US tourism industry benefits from influxes of international visitors looking for bargains on their trips.
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