The Decline of the US Dollar: What Does It Mean?

As the US Dollar continues to plummet to new lows on Forex markets, many business owners and managers are wondering what it means to them. The answer is fairly simple, but it really depends on your perspective and the type of business you are in.

First off, I need to explain that the US Dollar is not really losing its value. The value of the US Dollar (domestically) is actually a function of inflation. The US Federal Reserve has been very proactive about controlling the liquidity of currency in the market to insure inflation does not rise. In fact, the US Dollar is really only losing its value compared to other currencies. Or in other words, other currencies have more buying power than the Dollar.

Domestic Purchasing Power

So, what does that mean to the US? Domestically, nothing has changed. In fact, if the value of the Dollar on the Forex market was not on the news, US consumers would be completely unaware. Domestic products remain the same price, however products imported from countries whose currency is stronger than the Dollar are becoming more expensive (requiring more US Dollars to purchase). This makes the consumption of US made goods more economical here in the US.

US Exports

For businesses that export US goods overseas, the weak Dollar is good news. Strong foreign currencies can purchase more US made goods, making US imports more economical than (foreign) domestically produced goods. Therefore, the weak Dollar will actually increase US exports, stimulating US production.

US Imports

However, US businesses that rely on foreign imports are negatively affected by the weaker US Dollar. In order to purchase goods made in countries with stronger currencies, more US Dollars are required than before. This makes imported goods more expensive than US made goods, and therefore less economical to US consumers.

Travel

While a weak US Dollar is relatively meaningless to US consumers domestically, it really affects US citizens traveling abroad. Strong currencies in foreign countries means more US Dollars are required to purchase goods, making travel abroad expensive. The reverse is true for foreign tourists wishing to visit the US, making our country an inexpensive vacation destination.

Weak Dollar = Good News?

US citizens tend to make a strong US Dollar a point of pride. Reactions to the declining value of the US Dollar on the Forex market have ranged from humility to outrage with our elected officials. However, a weakening Dollar is actually a benefit to the US right now. With an economy on the brink of recession, a weak Dollar will increase US exports and tourism in the US by foreign tourists. Increased US production linked to the decline in the value of the Dollar abroad will translate into more jobs in the US.