Asked in Investing and Financial MarketsEconomicsEl Nino and La Nina
Weak dollar is normally expected to cause?
April 07, 2011 6:57AM
Since a weak dollar would mean that people in other countries will be able to purchase more US products for the same price, their demand would create a need for more products.
This demand would cause manufacturers to hire more employees and thus lower unemployment.
First, let's understand the U.S. dollar has been the so-called "world currency" since 1944. These days, more nations peg their currency against the dollar than not. These nations do not want to see the dollar weaken because, in short, it tends to hurt their economy when the dollar has less value than what they put into it. On the other hand, the U.S. tends to benefit from a weak dollar, in short term, because: 1.) It makes our debt to foreign investors (namely China and Japan) smaller... the debt is in U.S. dollars, so, a dollar that is lower-priced is cheaper to pay back-- but, the downside is they will tend to raise interest rates on future loans to us though. 2.) U.S. exports (look at what Ford Motor Co. is getting ready to do, along with many other U.S. manufacturers) are cheaper to manufacture, thus making exports more competitively priced and hopefully closing the gap, even slightly, on our trade deficit. 3.) Foreign tourists (mainly those from Europe, Canada, Australia...), students, etc. will find this a perfect time to come to the U.S. and spend their money because their money simply goes farther now... which is good for American retailers and universities alike. The bad part is it's more expensive for us to travel and buy merchandise, hotels, etc. there. 4.) Imports most likely will not be priced higher (for now) because foreign manufacturers will be reluctant to raise prices for the simple reason they rely on income from the massive U.S. market share on imported products and do not want to threaten their own economy by importing less products. (U.S.-made products become less expensive to make and thus more competitive as well. The Chinese currency is the yuan and is paralleled in worth almost exactly with the dollar which is why their products have been so competitively priced for so long. Think Wal-Mart.) 5.) Oil prices do rise when the dollar weakens. Oil is traded in U.S. dollars and oil-rich nations try to compensate for the loss in revenue by raising prices, BUT... the upside to this is that developing and using alternative fuel sources will drastically reduce our dependence on fossil fuels (and foreign oil of course) and ultimately enrich our environment for future generations. 6.) Gold prices also go up when the dollar goes down as long as demand for gold (as an alternative investment) increases (as with many commodities). Buy futures in gold right now. Sell when the dollar starts to go back up. This is an afterthought and I'm sure you've seen the commercials, but people tend to invest in commodities when the dollar weakens, thus increasing demand and driving up prices-- therefore making futures more lucrative (for now). Just remember to set a stop-loss point and sell when it begins to go the other way. When the dollar is weak you can hedge on futures contracts because many things tend to be on the upward swing, but remember that with that comes higher inflation, higher interest rates, etc. These are trends that don't tend to last for very long so take advantage of every opportunity you can before the dollar makes a comeback and hopefully evens out before too long. I'm no financial advisor as many of you can probably tell, but I do like the question and this is the best I can do with it. Thank you for listening.