A Weaker Dollar

My dollar is strong. Does that mean it can beat up the yen or the pound? In a sense, yes. A strong currency is currency that has favorable exchange rates. In other words, the strong currency has more value abroad than domestically. A luxurious Spanish hotel and spa might be worth quite a sum of money, but with US dollars, it might be equivalent to the cost of a movie ticket (which could still be considered expensive at certain theaters). Of course, this value isn’t solely relevant to vacationers; the strength of a currency is significant in regards to international trade.

By definition, countries with strong currencies find it harder to export. Because a currency like the dollar has so much value, any price for a good is naturally higher in comparison to a weaker currency; in other words, a bad deal. Perhaps the contrast is easier to understand. Weaker countries, like China, have currencies that are literally worth less. Thus, they are willing to take lower prices for their goods because even with a lower price, the profit is enough to sustain them. These countries can still function, because the real costs of their goods and labor are lower.

Furthermore, the reverse is true for both cases. It is a steal to sell to a country with a strong currency, because they will likely pay you more than a weaker country would. Likewise, it is a terrible deal to sell to that weaker country, as the value of the good is lower (meaning the price you can sell for will be too).

Overall, countries with strong currencies find it more difficult to sell their goods but have lots of people who want to sell to them, and countries with weaker currencies find it easy to sell their goods but struggle when buying any. These relationships between strong and weak countries also go hand-in-hand with international relationships. USA and China are a perfect example. The US imports heavily from China, but doesn’t export very much. As a result, we have hundreds of billions in trade deficits that grow larger by the year.

Traditionally, America has had a strong dollar. After recovering from the financial crisis of 2008, it is beginning to raise interest rates (making government securities attractive to foreign investors). The new president, Donald Trump, also aims to use fiscal stimulus through large infrastructure projects, which stimulate the economy and are accompanied by rate hikes.

However, Trump also paradoxically supports a weak dollar. He believes the Chinese yen is too weak, which is another way of saying the dollar is too strong. He also calls for protectionist policies, which would increase American exports (which is what countries with weak currencies do!). How will these strategies will play out? No one is quite sure yet, but let’s see how it goes.

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