If you’re reasonably well informed, you’ve heard the term “hard dollar” all your life, especially in recent years since the value of the dollar has steadily climbed for the past 15 or so years. But if someone 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”?
Typically, when economists say the dollar is strong, they’re talking about it relative to other countries.
“A strong dollar means U.S. exports are more expensive for foreign citizens to buy — and U.S. imports are cheaper for Americans to buy,” says Christopher Magee, professor of economics at Bucknell University, in Lewisburg, Pennsylvania.
What makes the dollar strong?
“The dollar typically rises when the Fed pushes U.S. interest rates higher because higher U.S. interest rates make it attractive for foreign investors to buy U.S. assets such as bonds,” Magee said.
But there are a few other factors that make for a strong dollar as well, observes Christopher Ball, an associate professor of economics at Quinnipiac University in Hamden, Connecticut.
“Global investors want to move their money to the United States to benefit from the higher interest rates, a return on investment for them,” says Ball, who adds that the fact that the United States is considered to have the economy strongest and safest place to invest in the world doesn’t hurt either.
Put it all together and you have a strong dollar.
What does a strong dollar mean for Americans and the economy?
This can mean both good and bad things, economists say. Here’s how.
A strong dollar can harm American businesses. You wouldn’t think there would be any downside to a strong dollar. The problem arises when American companies try to sell in foreign markets. They may find that many residents are reluctant to purchase their products because they are more expensive than what locals can buy if they buy goods or services made or developed in their own country.
Or if you are a US company competing with countries that import products into the US, customers will be enthusiastic about the cheaper prices of international competitors. The strength of the US dollar could potentially harm your US business.
A strong dollar can be a boon for the US buyer. What’s ugly for some American companies is great for the American consumer. Because a strong dollar means cheaper foreign imports and everyone likes a bargain.
“A strong dollar is good news for American consumers, who pay lower prices when buying imported goods,” Magee said.
A strong dollar can be a gift for the American traveler. In the United States, you may feel like your dollar isn’t buying much at all. Ball says inflation erodes the power of the dollar in the United States. With everything generally being 8% to 9% more expensive, he says, “we’re all feeling this erosion in the value of the dollar.”
But it’s a different story when you travel.
“In a global market, there’s a second dollar value that matters,” says Ball. “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, puts it this way.
“If you literally imagine trying to acquire euros, you can currently get around 1 euro for 1 dollar – whereas in March 2008 it would have cost you around 1.50 dollars per euro,” says Struby.
In March 2008, if you spent $5,000 on vacation in Europe, you would trade that in for around 3,333 euros. Now you’ll spend $5,000 and probably get around $5,000 to spend on your vacation.
What does a strong US dollar mean for other countries?
In the rest of the world, a strong dollar can also be a very good thing – or a bad thing – depending on your point of view.
Yeva Nersisyan is associate professor and chair of the economics department at Franklin & Marshall College in Lancaster, Pennsylvania. She says that while Americans buy cheap imports and find good deals, the opposite often happens in other countries.
“Products made in the United States are now more expensive for them, because they have to pay more in their national currency for the same product. So, all things being equal, we would expect a stronger dollar to further encourage imports into the United States and discourage exports from the United States to the rest of the world,” narcissistic said.
A strong dollar can be particularly wonderful or distressing 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 bright side of the ledger? If the United States imports a lot of products from emerging markets, these emerging countries do a lot of business and make good profits. It’s a good deal for everyone.
On the other hand, Weise says these emerging markets could take on a lot of US debt.
“The stronger dollar means these debts are harder to pay off,” Weise said. “The worst-case scenario is a wave of debt crises like the one the world experienced in the 1980s, which could end up causing problems for the American financial system since it is the American financial institutions that owe this money.”
Hopefully, of course, that won’t happen.
The basics of a strong dollar
How you feel about a strong dollar depends on where you are on the economic spectrum. Still, there’s a good argument that it’s better to have a strong dollar than a weak dollar – at least right now. Many economists say a strong dollar can help reduce inflation.
According to David Gulley, professor of economics at Bentley University in Waltham, Massachusetts, as foreign products become cheaper, US products that compete with their foreign counterparts have a strong incentive to lower their own costs.
“Automobiles, consumer electronics, and a whole host of other goods are getting cheaper. So our hard-earned dollars will go further,” says Gulley.
But, overall, is a strong dollar a good or bad thing?
“Overall, the strong dollar is neither good nor bad for the economy. This benefits some US citizens – consumers and businesses that depend on imported intermediate goods – and hurts others,” Magee says.
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