Question

International Finance (10)

1. What does it mean for the U.S. dollar to be “strong” or “weak”?

2. Who gains and who loses from a weak or a strong dollar and why? Is it better for a country to have a weak or a strong dollar?

Answer 1

1. What does it mean for the U.S. dollar to be “strong” or “weak”?

In the foreign exchange market, the two terms, weak dollar and strong dollar, are often used for describing the relative value and strength of the U.S. dollar against other currencies. A strong dollar means is a strengthening dollar indicating U.S. dollar has increased in value in comparison to another currency, thus reflecting that the U.S. dollar now buys more of the other currency than it did before. On contrary a weakening U.S. dollar indicates that the U.S. dollar has fallen in value in comparison to the other currency,, thus reflecting that the U.S dollar buy less of the other currency.

2. Who gains and who loses from a weak or a strong dollar and why? Is it better for a country to have a weak or a strong dollar?

Assuming other things equal, a stronger dollar makes U.S. goods relatively more costly for foreigners, as a result it benefits U.S. consumers of foreign goods (imports) and hurts U.S. exporters and U.S firms that might not export however do compete with imports. On contrary, a weaker dollar makes foreign goods (imports) relatively more costly for U.S consumers, which benefits exporters of U.S. goods and U.S. firms that compete with imports. It is important to maintain a balance between a strong dollar and a weak dollar for an economy and stock investors. This will allow manufacturers to compete in the international market and consumers pay reasonable prices for imported goods