If you’re relatively well-versed, you’ve heard the term “strong dollar” your whole life, especially over the past several years since the dollar has steadily appreciated over the past 15 years or so. But if someone asked you to select a strong dollar, would you?
Here’s what you need to know about the meaning of a strong dollar.
What does it mean when people use the term “strong dollar”?
In general, when economists talk about the strength of the dollar, they discuss it in relation to other countries.
“A strong dollar means that US exports are more expensive for foreign nationals to buy — and imports into the US are cheaper for Americans to buy,” says Christopher Magee, professor of economics at Bucknell University, in Lewisburg, Pennsylvania.
What makes the dollar strong?
“The dollar usually rises when the Fed raises US interest rates because higher US interest rates make buying US assets like bonds attractive to foreign investors,” Magee says.
But two other factors are also driving the dollar higher, notes Christopher Ball, associate professor of economics at Quinnipiac University, in Hamden, Connecticut.
“Global investors want to move their money to the US to take advantage of the higher interest rates, and the return on investment for them,” Paul says, adding that the fact that the US is seen as having the world’s strongest and safest investing economy doesn’t hurt either.
Put it all together, and you’ll have a solid dollar for yourself.
What does a strong dollar mean for Americans and the economy?
It can mean both good and bad things, according to economists. Here’s how.
A strong dollar could hurt US companies. You wouldn’t think there would be any downside to a strong dollar. The problem comes when US companies try to sell in foreign markets. They may find that many residents are reluctant to buy their products because they are more expensive than locals would buy if they purchased goods or services manufactured or developed in their own countries.
Or if you are a US company that competes with countries that import products into the US, customers will be excited about the cheap prices of international competitors. The strength of the US dollar is likely to hurt your US business.
A strong dollar can be a boon to the American shopper. What is bad for some American companies is good and great for the American consumer. Because a strong dollar means foreign imports are cheaper, and everyone loves the deal.
“A strong dollar is good news for American consumers, who pay lower prices when they buy imported goods,” says Magee.
A strong dollar can be a gift for the American traveler. In the United States, you may feel like the dollar isn’t buying much at all. The ball says so inflation Undermining the dollar’s strength in the US with the cost of everything rising 8% to 9%, he says, “we are all feeling the erosion of the dollar.”
But it’s another story when you travel.
“In the global market, a second dollar is important,” says Paul. “The international value of a dollar is what we can buy from foreign stores, producers and even restaurants and hotels if we travel.”
But the magic happens when you exchange your currency. Ethan Strobe, assistant professor of economics at Carleton College in Northfield, Minnesota, explains it this way.
“If you literally imagine trying to get some euros, you can now get 1 euro for 1 dollar — whereas in March 2008 it would have cost you about $1.50 per euro,” says Strobe.
Back in March 2008, if you spent $5,000 on a European vacation, you can exchange it for about 3,333 euros. Now you’ll spend $5,000 and you’ll likely have around 5,000 euros to spend on your vacation.
What does a strong US dollar mean for other countries?
In the rest of the world, a strong dollar can also be a very good thing – or a bad thing – depending on one’s point of view.
Yeva Nersesian is associate professor and chair of economics at Franklin and Marshall College in Lancaster, Pennsylvania. She says that while Americans buy cheap imports and find travel bargains, the opposite often happens in other countries.
“Products made in the US are now more expensive for them as they have to pay more in their local currency for the same product. So all else being equal, we expect a stronger dollar to encourage more imports into the US and discourage exports from the US to the rest of the world,” narcissian Says.
A strong dollar could be especially good or sad for emerging countries, according to Charles Wise, professor of economics at Gettysburg College, in Gettysburg, Pennsylvania. Emerging countries are countries that have only recently begun to develop a strong middle class, such as Vietnam, Poland or Thailand, to name a few.
On the good side of the ledger? If the US is importing a lot of products from emerging markets, then those emerging countries are doing a lot of business and making good profits. This is a good business deal for everyone.
On the other hand, Wise says these emerging markets are probably taking a lot of US debt.
“A stronger dollar means it’s harder to repay those debts,” Wise says. “The worst-case scenario is a wave of debt crises like what the world saw in the 1980s, which could end up causing problems in the US financial system because it is US financial institutions that owe the money.”
I hope, of course, that doesn’t happen.
Conclusion on the strong dollar
How you feel about a strong dollar depends on where you are in the economic spectrum. However, there is a good argument that it is better to have a strong dollar than a weak dollar – at least for now. Many economists say that a strong dollar can help reduce inflation.
As foreign goods get cheaper, goods produced in America that compete with their foreign counterparts have more incentives to lower their costs, according to David Jolly, professor of economics at Bentley University in Waltham, Massachusetts.
“Cars, consumer electronics, and a whole host of other goods are getting cheaper. So our hard-earned dollars are going to go even further,” says Julie.
But, in general, is a strong dollar a good or a bad thing?
In general, a strong dollar is neither good nor bad for the economy. Maggie says it benefits some American citizens — consumers and businesses that depend on imported intermediate goods — and hurts others.