Advantages and disadvantages of a weak dollar A weak dollar can be a good thing for U.S. firms who want to sell goods in foreign markets. Because foreign products and services become relatively more expensive, U.S. products and services become more competitive overseas.
In summary, the biggest beneficiaries of a weaker dollar are American exporters. This happens because these companies' goods become a bit cheaper when the dollar declines. Some of the companies that benefit are firms like Lockheed Martin and Boeing.
Investing in U.S. exporters, tangible assets (foreigners who buy U.S. real estate or commodities), and appreciating currencies or stock markets provide the basis for profiting from the falling U.S. dollar.
Key Takeaways
A strong dollar is good for some and not so good for others. A strengthening dollar means U.S. consumers benefit from cheaper imports and less expensive foreign travel. U.S. companies that export or rely on global markets for the bulk of their sales are financially hurt when the dollar strengthens.
A weak Dollar is less of a drag on the technology sector, which generates a lot of revenue overseas. Interest in foreign stocks may rise as the Dollar loses its luster.
From the shareholder's perspective, a weak dollar can be a good thing in moderate doses, but there are pitfalls to a prolonged dollar slide.
A strong dollar crimps income that companies earn abroad, since money brought in in the form of weaker foreign currencies is converted into fewer dollars.
Weak currencies often result in inflation in the country, more currencies are needed to purchase goods because the value of the currency has declined. A country with a weak currency and does more of imports than exports will experience a spike in inflation.
Changes in currency rates can have an inverse impact on a country's inflation in subsequent months, according to a recent research note from Goldman Sachs. In other words, declines in a country's exchange rate can raise the cost of imported goods and lead to increased inflationary pressures.
Essentially, a weak dollar means that a U.S. dollar can be exchanged for smaller amounts of foreign currency. The effect of this is that goods priced in U.S. dollars, as well as goods produced in non-US countries, become more expensive to U.S. consumers.
A strong dollar makes imported goods cheaper for US consumers.
Currency devaluations can be used by countries to achieve economic policy. Having a weaker currency relative to the rest of the world can help boost exports, shrink trade deficits, and reduce the cost of interest payments on outstanding government debts. There are, however, some negative effects of devaluations.
1. Kuwaiti dinar. Known as the strongest currency in the world, the Kuwaiti dinar or KWD was introduced in 1960 and was initially equivalent to one pound sterling. Kuwait is a small country that is nestled between Iraq and Saudi Arabia whose wealth has been driven largely by its large global exports of oil.
A weaker currency means that it costs more for a country to import food, energy and other goods. That adds to domestic inflation, hurts households and could contribute to a global downturn.
This means that more dollars are required to buy goods if the currency's value has fallen. Further, given that commodities are traded worldwide, a weaker dollar means commodities are less expensive in other currencies – this increases demand.
This is because, when the dollar crashes, the value of foreign stocks and mutual funds, which are typically priced in the local currency, becomes more expensive for US investors. As a result, the value of their investments in foreign stocks and mutual funds may decrease.
Stockholders get some protection from inflation because the same factors that raise the price of goods also raise the value of companies. Meanwhile, companies can raise prices to shelter their profitability from inflation, but some firms have thinner profit margins, such as retail and restaurants.
A strengthening U.S. dollar means that it now buys more of the other currency than it did before. A weakening U.S. dollar is the opposite—the U.S. dollar has fallen in value compared to the other currency—resulting in additional U.S dollars being exchanged for the stronger currency.
In general, inflation tends to devalue a currency since inflation can be equated with a decrease in a currency's buying power. As a result, countries experiencing high inflation tend to also see their currencies weaken relative to other currencies.
The strong dollar feeds into inflation pressures abroad.
When a country's currency weakens against the dollar, the price of imports from the United States rises, putting pressure on prices. On average, the pass-through of a 10 percent dollar appreciation into inflation abroad is 1 percent.
The strong dollar makes imported goods cheaper and exported goods more expensive. Cheaper imports are generally good for consumers and for companies that use foreign-manufactured supplies, but they can undercut domestic sales by U.S. producers.
A weakening US dollar could provide a tailwind for EM investors. Additionally, EM equities have historically been less efficient than developed markets equities, making EM an attractive asset class for active management.
When the U.S. dollar is strong, American-made goods become more expensive — and less attractive to shoppers — in other countries. People living in many other countries where the currency is now weaker than the dollar may think twice about traveling to the United States.
The simplest way for investors to benefit from the surging U.S. dollar is to buy ETFs that track currency indexes. Two large funds that aim to do this are the Invesco DB US Dollar Index Bullish Fund (UUP) and the WisdomTree Bloomberg US Dollar Bullish Fund (USDU) .