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Geoff Williams | Sept. 12, 2022,
If you’re relatively well informed, you’ve heard the term “strong dollar” throughout your life, especially over the last several years since the value of the dollar has been steadily climbing over the last 15 years or so. But if somebody asked you to define a strong dollar, could you?
Here’s what you need to know about what a strong dollar means.
What Does It Mean When People Use the Term ‘Strong Dollar’?
Generally, when economists talk about the dollar being strong, they’re discussing it in relation to other countries.
“A strong dollar means that U.S. exports are more expensive for foreign citizens to buy – and imports into the U.S. are cheaper for Americans to buy,” says Christopher Magee, a professor of economics at Bucknell University, in Lewisburg, Pennsylvania.
What Makes the Dollar Strong?
The Federal Reserve often has a lot to do with that.
“The dollar usually rises when the Fed pushes U.S. interest rates up because higher U.S. interest rates make it attractive for foreign investors to buy U.S. assets such as bonds,” Magee says.
But there are a couple other factors that also make a strong dollar, observes Christopher Ball, an associate professor of economics at Quinnipiac University, in Hamden, Connecticut.
“Global investors want to move their money to the U.S. to benefit from the higher interest rates, a return on investment for them,” Ball says, who adds that the fact that the U.S. is viewed as having the strongest economy and being the safest place to invest in the world doesn’t hurt either.
Put it all together, and you’ve got yourself a strong dollar.
What Does the Strong Dollar Mean for Americans and the Economy?
It can mean both good and bad things, according to economists. Here’s how.
A strong dollar can hurt American businesses. You wouldn’t think there would be any downside to a strong dollar. The problem comes when American firms try to sell in foreign markets. They may find that a lot of residents are reluctant to purchase their products because they’re more expensive than what locals can buy if they purchase merchandise or services manufactured or developed in their own countries.
Or if you’re an American company competing with countries importing products into the U.S., customers are going to be excited by international competitors’ cheaper prices. The strength of the American dollar could potentially hurt your American business.
A strong dollar can be a boon for the American shopper. What’s lousy for some American businesses is fine and dandy for the American consumer. Because a strong dollar means that foreign imports are cheaper, and everybody likes a bargain.
“A strong dollar is good news for U.S. consumers, who get to pay lower prices when they buy imported goods,” Magee says.
A strong dollar can be a gift to the American traveler. In the U.S., you may feel like your dollar doesn’t buy that much at all. Ball says that inflation erodes the power of the dollar in the U.S. With everything generally being 8% to 9% more expensive, he says, “we all feel that erosion of the dollar’s value.”
But it’s another story when you travel.
“In a global market, there is a second value of the dollar that matters,” Ball says. “The international value of the dollar is what we can buy from foreign stores, producers and even restaurants and hotels if we travel.”
But the magic happens when you exchange your currency. Ethan Struby, assistant professor of economics at Carleton College in Northfield, Minnesota, explains it this way.
“If you imagine literally trying to acquire some euros, right now you can get about 1 euro for $1 – whereas back in March 2008, it would have cost you about $1.50 per euro,” Struby says.
Back in March of 2008, if you were spending $5,000 on a European vacation, you’d exchange that for around 3,333 euros. Now you’ll spend $5,000 and will likely get around 5,000 euros to spend on your vacation.
What Does the Strong U.S. Dollar Mean for Other Countries?
In the rest of the world, a strong dollar can also either be a very good thing – or a bad thing – depending on one’s point of view.
Yeva Nersisyan is an associate professor and department chair of economics at Franklin & Marshall College in Lancaster, Pennsylvania. She says that while Americans are buying cheap imports and finding travel bargains, the opposite is often playing out for other countries.
“Products made in the U.S. are now more expensive for them since they have to pay more in their domestic currency for the same product. So all else equal, we would expect a stronger dollar to encourage more imports into the U.S. and discourage exports from the U.S. to the rest of the world,”Nersisyansays.
A strong dollar can be particularly wonderful or woeful for emerging countries, according to Charles Weise, professor of economics at Gettysburg College, in Gettysburg, Pennsylvania. Emerging countries are nations that have only recently begun to develop a strong middle class, such as Vietnam, Poland or Thailand, to name a few.
On the good side of the ledger? If the U.S. is importing a lot of products from emerging markets, those emerging nations are doing a lot of business and making a good profit. That’s a good business deal for everyone.
On the other hand, Weise says that these emerging markets may be taking a lot of American debt.
“The stronger dollar means those debts are harder to pay off,” Weise says. “The worst case scenario is a wave of debt crises such as what the world experienced in the 1980s, which could end up causing problems in the U.S. financial system since it’s U.S. financial institutions that are owed this money.”
Hopefully, of course, that will not come to pass.
The Bottom Line on a Strong Dollar
How you feel about a strong dollar depends where you stand on the economic spectrum. Still, there is a good argument that it’s better to have a strong dollar than a weak one – at least right now. Many economists say that a strong dollar can help reduce inflation.
As foreign goods become cheaper, American-produced goods that compete with their foreign equivalents have a lot of incentive to reduce their own costs, according to David Gulley, an economics professor at Bentley University in Waltham, Massachusetts.
“Autos, consumer electronics, and a whole host of other goods get cheaper. So, our hard-earned dollars will go further,” Gulley says.
But, on the whole, is a strong dollar a good thing or a bad thing?
“Overall, the strong dollar is not good or bad for the economy. It benefits some U.S. citizens – consumers and firms that rely on imported intermediate goods – and hurts others,” Magee says.