Question

Some people think that a “strong dollar” should be a point of national pride. Suppose that the value of the dollar were to rise relative to foreign currencies; that is, a dollar could buy more units of foreign currencies than before. What impact would that have on consumers and businesses that buy imported goods?

Answer 1

In general, a strong dollar is good for imports and a weak dollar is good for exports.

To put things into perspective, when the dollar is strong as compared to a foreign currency, the consumers or business can buy more business or services with the same amount of dollars due to higher purchasing power.

Specific to consumers, when the dollar is strong and consumers buy more of imported goods, the basket of goods and services can expand on higher purchasing power. This is likely to translate into higher consumption spending and it also implies higher standards of living as consumers have the power to buy more goods that satisfy more than the necessity.

Further, when the dollar is strong, businesses that import goods (raw material) for consumption or assembling locally benefit. With the purchasing power increasing, the business can import more of goods. This translates into relatively lower per unit cost of goods and business can report higher margins.

In other words, a stronger dollar against a importing nation currency also acts as a natural subsidy for goods and services in the local market.

The best example of this point is the US-China trade. The United States accelerated as a consumption based economy after the TMT bubble in the year 2000. Most of the goods and services were imported for consumption from China and few other emerging markets that has a weaker currency against the dollar.

The US consumers therefore got goods and services at an attractive price and that boosted consumption spending in the economy. At the same time, several intermediate business products were manufactured in China that allowed businesses to have higher profit margin even with product pricing being relatively reasonable. Therefore, the consumers as well as businesses gained from a stronger dollar.