Strong Vs. Weak Dollar: A Super Simple Breakdown of What it Actually Means
What’s best for Americans: a strong dollar or a weak one?
If you were an economist, you’d likely roll up your sleeves and get excited for what could easily be a back-and-forth conversation all day.
But you’re probably not an economist — so, with sleeves rolled down, you might be tempted to accept the oversimplified “strong equals good” notion that’s been around for more than two decades.
Don’t do that!
I promise it’s not as complicated as you think. And if you’ve ever planned an international trip, worked for a car manufacturer, purchased pretty much any electronic device or even bought a tank of gas, it’s definitely worth understanding.
But First: Why is the Strong vs. Weak Dollar Debate Happening?
Right now, our president and newly confirmed Secretary of Treasury seem to have opposing views on which one it better.
In one corner, there’s President Donald Trump who’s described the dollar as “too strong.” He’s advocating for a weaker dollar, which could help him deliver on his campaign promise of creating more manufacturing jobs.
How so? Because it increases the amount of products U.S. companies are able to export each year. (More on this in a bit.)
In the other corner is Secretary Steven Mnuchin, an ex-investment banker from Goldman Sachs. He got flak after writing “an excessively strong dollar may have negative short-term implications on the economy” in response to a senator’s question ahead of his confirmation hearing for his new job.
But overall, Mnuchin’s views fall in line with other policymakers of the past 20 years. He believes the stronger dollar is a sign of a robust economy and solid standing for the U.S in the world market.
Mnuchin’s view is not surprising to Brian Gendreau, a finance professor in the University of Florida’s Warrington College of Business. He’s an economics expert, so we asked him to weigh in on the debate.
“As a matter of public policy, almost every U.S. Secretary of Treasury has always said that the U.S. has a strong dollar policy,” Gendreau said. “They probably say that because if they say anything else, the dollar might plummet.”
But what does it mean to have a strong dollar?
The Case for the Strong Dollar
In the simplest terms, when a dollar is strong it’s worth more in comparison to money from other countries.
Here’s an example: According to the Bank of Canada, it would take only about $7.50 in American dollars to equal $10 in Canadian dollars. This means our dollars are able to stretch a bit further in Canada than the dollars of our Canadian friends in the U.S. That makes us powerful consumers in Canada and some other countries, thanks to our strong dollar.
That spending power also translates to cheaper foreign goods, such as electronics, imported food and sometimes even high-ticket items like cars.
“It’s good for you as a tourist,” Gendreau said. “If the dollar is strong, it buys a lot more abroad and often things will feel cheaper to you. Once you change your dollars into pesos or British pounds, it’s going to buy more locally.
“By the same token, it makes imports cheaper for Americans. If you want to buy a car that was made in Korea or Japan or any country, if currencies depreciate relative to the dollar, it’s going to be cheaper.”
If you’re like me, you probably think that sounds great. I like taking vacations. I like spending money like I imagine rich people do when on said vacations. I drive a Hyundai.
So, why would it be a mistake to assume a strong dollar is always good?
The Case for the Weaker Dollar
Disagreeing with Trump hasn’t exactly been difficult for many people. But I can see his point on this topic.
While Mnuchin doesn’t believe a weak dollar is a good long-term strategy, one of Trump’s main campaign promises was to revitalize the manufacturing industry and create jobs for American workers. A weaker American dollar could help make that happen.
Although our money might not stretch as far in other countries, if Trump got his way, a weaker dollar could make our American-made products more affordable to foreign consumers. (That happens because their money will now stretch a bit further here. So, theoretically, foreigners would visit more often and buy more of our stuff.)
That could translate to a huge boost in the bottom lines for U.S.-based businesses like Intel, which makes as much as 80% of its annual revenue outside of the U.S., according to Gendreau.
“A lot of U.S. companies sell more abroad than you would ever imagine,” Gendreau said. “ A strong dollar is not so good for U.S. exporters. In fact, in 2014 when the dollar popped up for the first time, it led to really sharp declines in earnings estimates for major U.S. corporations.”
Trump’s call for a weaker dollar holds water when we assume — as the dollar weakens and companies like Intel sell more products overseas — that could also translate into more job openings here at home.
Yes, the Dollar Can be “Too Strong”
Determining whether #teamstrongdollar or #teamweakdollar is right comes down to why the dollar is strong in the first place, Gendreau said.
When the economy is thriving and the value of the dollar is rising along with it, that’s generally a good thing. But it’s possible for the dollar to rise too fast for the rest of the economy to keep up. That happened in the mid-1980s.
“It killed U.S. agricultural exports,” Gendreau said. “I’m from the Midwest, originally, and I can remember how you could visibly see the hardship in rural areas.”
At the time, the shabby grocery stores and storefronts, and peeling paint on homes were proof that — despite the strong dollar — business owners who depended on exporting products to other countries were struggling.
According to Trump, that’s the problem now. He believes the purported value of the dollar is too high for its actual worth, and that’s why some industries are not making as much money as they have in the past.
Gendreau, however, said he doesn’t believe we are in that state now and the dollar is legitimately as strong as economists have valued it.
Your Turn: What do you think? Is Donald Trump’s call for a weaker dollar the right move?
Desiree Stennett (desi_stennett) is a staff writer at The Penny Hoarder. She’s in the strong dollar camp because she likes to travel and loves her Hyundai.
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