International Finance: The Dollar and the U.S. Economy

The Dollar and the U.S. Economy

A strong dollar—one that can purchase more foreign currency relative to a weak dollar—means that U.S. consumers pay less for imports. It also means that foreign consumers must pay more for U.S. exports.

A weak dollar—one that can purchase less foreign currency relative to a strong dollar—means that U.S. consumers must pay more for imports from foreign nations. However, foreign consumers will pay less for U.S. goods and services, which will help increase production and employment in America.

So the strong dollar and the weak dollar each have positive and negative effects. Think about it: A strong dollar helps U.S. consumers because it makes foreign goods, which American consumers clearly enjoy buying, cheaper. Yet it hurts U.S. exports and therefore U.S. production and employment. It also makes the United States a less affordable travel destination for foreign visitors.

Meanwhile, a weak dollar makes U.S. exports and travel in the United States more affordable for foreigners. That helps U.S. production and employment. However, it also raises the price of imports for Americans. This, in a sense, limits U.S. consumers' choices (and can contribute to inflation), but it shifts buying behavior in favor of U.S. products, which also helps U.S. employment.

The best “dollar policy” is, therefore, one that balances the pros and cons of a strong and weak dollar, and that takes the economies of our trading partners into account. That last point can be important: A dollar that is strong against the euro, for example, will weaken the euro. EU products will become more affordable to Americans, and Americans will be encouraged to travel to Europe. That can help EU nations struggling with recession and unemployment.

Indeed, much of Europe and Asia correctly view the United States as the engine of growth for the global economy. The U.S. market is so large, strong, driven by consumption, and partial to imports that it can boost production in European and Asian nations. That's a large responsibility and one that Americans, by virtue of their free spending ways, unwittingly but willingly take on. Likewise, when the U.S. business cycle turns down and demand decreases, no one in Europe or Asia is happy about it. Of course, economic policies and behavior in Europe and Asia are larger determinants of their economic fate. So it would be going too far to say, “When the U.S. sneezes, Europe catches cold,” but there is a grain of truth in it.