The Effects of U.S. Dollar Fluctuations

Movements in the foreign exchange value of the United States dollar have an effect on the U.S. economy, interest rates, domestic and international trade, investments, and the monetary policies of not only America but other nations around the world. The effects of a rising greenback relative to other currencies are varied and substantial. Let's examine some of the consequences that a stronger dollar would generate on the global economic stage (a falling dollar would, of course, produce opposite effects). For example:

  • Foreign individuals holding U.S. dollars would receive more foreign currency per dollar when exchanging those dollars for their home currency. American travelers abroad would also benefit from a stronger dollar, receiving a greater amount of local currency for each dollar they trade.
  • Foreign-based importers who sell goods or services to the United States are paid in dollars and would therefore obtain more of their home currency in exchange. As a result, they can afford to charge less in dollars for their goods or services, and can be more competitive relative to U.S. providers of similar items. Consequently, imports would rise in the U.S. balance of payments accounts. Demand for comparable domestic goods and services would drop, and price competition from imports would further reduce the ability of U.S. companies to increase prices, which in turn would put downward pressures on inflation. The slowing of the economy and downward price influences would help to depress U.S. interest rates.
  • U.S. exporters selling their goods and services overseas are paid in foreign currencies and therefore receive fewer dollars when those currencies are changed into dollars. For this reason, U.S. exports must be priced higher or profit margins and profits will be lowered. Exports from the United States are thereby discouraged, and exports in the U.S. balance of payments accounts drop, causing the economy to slow. Again, downward pressure on U.S. interest rates results due to this weakening in demand.
  • Foreigners holding investments in the United States receive more income when they convert interest, dividends, and rent from dollars into their home currency. The value of those U.S. investments also appreciates when translated into their native tender. Foreign investment in the United States becomes more attractive, especially if the dollar is expected to continue to appreciate. Foreigners' willingness to invest in the U.S. continues as long as they feel little concern for the safety of their investments and have no fear of default. Because of the supply of funds flowing to America from abroad, U.S. interest rates are forced downward due to lower monetary demands.
  • Foreign investors who want to buy U.S. investments in a strong dollar market must pay more of their own currency to acquire dollars for the purchase. Therefore, investment in the United States is discouraged unless the investors believe that the value of the dollar will continue to rise. However, if investing from foreigners becomes sufficiently dissuaded, funds for domestic uses would have to come from domestic sources, thus placing upward pressures on U.S. interest rates.
  • Oil prices are denominated in U.S. dollars; therefore, dollar fluctuations have no effect on the cost of U.S. oil imports. However, other countries would need more of their currencies to obtain the necessary dollars to purchase oil, thereby diverting more resources to the procurement of oil and depressing their economies. Conversely, a stronger dollar would help oil-producing nations by allowing them to buy more foreign goods with the more valuable dollars they receive.

 

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