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The Federal Reserve on Monday announced that they are monitoring the falling U.S. dollar, but leaving interest rates unchanged to assist in an economic recovery. Low interest rates can stimulate an economy by allowing consumers and businesses the ability to spend more. However, low interest rates are straining the dollar and if a weakening dollar can’t be stabilized we could potentially risk a new economic crisis. Led by investors reducing their dollar holdings which would likely result in increased domestic interest rates.
The world’s strongest currency was once backed by gold and today it’s back by a promise! A promise made by the U.S government that the dollar can be convertible in an exchange. That promise seems as unrealistic as us (U.S.) ending our dependence on foreign oil!
By using the dollar as an economic tool to spur an economic revival from the worst economic crisis since the great depression, is like holding on to a double edged sword. No matter how you hold it, you’re going to end up cut. Which do you prefer; having a weak dollar vs. a strong dollar or having a strong dollar vs. a weak dollar?
The Benefits of a Weak Dollar
- U.S. companies export more goods to foreign market because those goods become less expensive
- Increase in foreign investment opportunities in the U.S.
- Increase in U.S. tourism
The Disadvantages of a Weak Dollar
- Higher prices for consumer as a result of currency dilution
- Higher interest rates
- More expensive for Americans to travel overseas
The Benefits of a Strong Dollar
- Importing goods becomes cheaper
- Increase in American investors buying foreign assets and other investment opportunities
The Disadvantages of a Strong Dollar
- American companies competing against foreign companies becomes much more difficult
- U.S. tourism is reduced
So rather than asking yourself which dollar you prefer, ask yourself how can we balance between a strong and weak dollar?
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