NCPA - National Center for Policy Analysis

What Does a Weak Dollar Mean for You?

August 5, 2011

The dollar's strength is judged against other currencies, and lately it has compared poorly against major rivals such as the Swiss franc, the Japanese yen, the Australian dollar and others.  When a dollar buys more than its equivalent in another currency, it's considered strong.  When it buys less than its equivalent, it's weak.  However, the actual exchange rate has little direct impact on individuals.  For consumers, what matters more is the purchasing power of those dollars -- reflected by the Consumer Price Index, says Fox Business News.

"The key is to make a distinction between impact on GDP [gross domestic product], which is important in getting out of a recession, and standard of living, which is of paramount interest in normal times," says Bob McTeer, former president of the Federal Reserve Bank of Dallas and a distinguished fellow at the National Center for Policy Analysis.  "A weaker dollar will stimulate GDP by encouraging exports and discouraging imports." 

According to McTeer:

  • A weakening dollar should have the effect of reducing the trade deficit. That hasn't happened, ironically, because the dollar has not been able to deteriorate enough.
  • Countries like China peg their currencies to the U.S. dollar, so those trade patterns tend to be somewhat insulated from fluctuations in the dollar.

But there's another problem: The United States is generally not a producer of cheap consumer goods, so it can't compete with countries that have cut-rate labor forces and a willingness to devalue their currency indefinitely.

Here are three ways a weak dollar can make you poor, says Fox:

  • Stagnant wages and increased outsourcing.
  • Gas and luxury goods cost more.
  • Overseas trips are more expensive for Americans.

Fortunately, a weak dollar is a cyclical phenomenon.  It's likely only a matter of time before the dollar strengthens against rival currencies.

Source: Sheyna Steiner, "How a Weak Dollar Drains Your Pocketbook," Fox Business News, August 3, 2011.

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