Today at TILE we asked about the recent weakness of the U.S. dollar. What does that even mean? Who determines the “strength” of our currency? What is the relationship between the strength or weakness of the dollar and the value of the things you buy? And why is it important when it comes to our standing in comparison to the rest of the world?
A “strong” dollar means that you can get a lot for your money, or that it has a higher value relative to other currencies. A “weak” dollar means the opposite: it takes a lot of greenbacks to purchase a smaller amount of foreign currency. Let’s say you went to England to study abroad for a semester. Hypothetically, when you arrived and exchanged your money, you were able to receive 1 British pound for every $2 you exchanged; but by the time you left, you could purchase 1 pound for just $1.60. In this situation, the dollar has gotten stronger and the pound has gotten weaker.
Since we know that currencies don’t lift weights, how does that strength change? In the U.S., the Federal Reserve (“the Fed”) determines the interest rate paid when people borrow money. To a certain extent, this impacts demand, or how likely someone is to decide to buy or invest in U.S. dollars versus another country’s currency. In addition, the U.S. Treasury determines the amount of money that is printed or in circulation, and this determines supply. We are currently printing lots of money (high supply) and paying a low interest rate for borrowing (high demand) – both are inflationary measures chosen with the desire to get consumers to start spending.
While the Fed and the Treasury determine the environment, the current exchange rate is determined by the market based on expectations for future interest rates and the amount of money in circulation.
When thinking about the value of the dollar to you, it is helpful to think about it in two ways: First, what can you purchase with a dollar within your own economy? Second, what can you purchase with that same dollar from other economies?
We can think about how much a dollar buys using jeans as an example. Let’s say you need a new pair. You might want to consider the cost of American-made jeans versus a hot European brand. When the U.S. dollar is stronger, those foreign brands don’t cost as much. However, when the dollar is weaker, it takes more dollars to purchase them. The same can be true for items that require imported raw materials. If it costs more for an American company to import coffee beans, then the cost of that latte in the morning will definitely be higher!
At present, the dollar is viewed as weaker than it was in the not-too-distant past. As the Economist magazine pointed out this week, foreign currencies are appreciating quickly – the value of the Euro has gone up 20% versus the dollar since March. But what’s more important than the current strength of our currency is that the rest of the world believes in our economy – that the government will stand by its financial commitments. We can view the fluctuation in the dollar’s strength as a kind of rebalancing, and an acknowledgment that policies, especially across economies, markets, and governments, change and are constantly in flux.
At the same time, it is important to think about the relationship of the dollar’s strength or weakness to the economy as a whole. A deliberate decision to “weaken” our currency can have a lot of positive benefits. It makes our exports – the products we make here and sell abroad – more affordable for foreign buyers. This is good for many companies that employee Americans to manufacture products for export. For example, it may make a car buyer in Europe choose to buy American since it costs less. In addition, non-U.S. products are more expensive here at home – perhaps leading consumers to buy American. The more American companies see sales increase, the better it is for our economy (e.g. jobs, income, etc.) Kind of complicated, yet very deliberate strategy and thinking.
So what does this mean for the TILE Community? In the immediate, you may want to start checking prices when you go to the store to buy a new pair of jeans or this year’s winter coat. Are the fancy European brands more expensive today than they were a few months ago? If the answer is yes, it could be because the dollar got weaker, the exchange rate shifted, and the cost to purchase non-U.S. products has gotten more expensive. With a weak dollar, you may think about buying American. And if you do, your purchase could get you a little more than a new pair of jeans: spending your money on American-made products stimulates local companies and encourages them to invest more, hire more, and produce more products in the future. Looking beyond what is happening in the store, what you do with your everyday purchasing power impacts the economy more than you think. So who knows? Buying a pair of locally-manufactured jeans today may not only save you a pretty penny, it might create a job for you in the future!
- Amy
Tags: currency, exchange rate, strong dollar, weak dollar