Market Insights, The US Dollar

Will the Dollar Weaken So Much It Crashes?

Gold Alliance disclaimer

The debate over whether we would benefit the most from a strong dollar or a weak one is highly complex. It involves global economics, politics, and stock markets. There is no best answer but definite clues.

History doesn’t provide an easy answer either. During Ronald Reagan’s first term, the dollar soared as the Federal Reserve increased short-term interest rates to counter inflation. This resulted in significant economic growth. However, in his second term, further interest rate cuts let to booming economic activity and saw the dollar dropping. Then, under Clinton, the US economy improved, and the perceived good health of the economy strengthened the dollar.

As you can see, there is no obvious correlation between the strength of the dollar and the strength of the economy. Sometimes, a troubled economy benefits from a weaker dollar, other times attempts by the Reserve to improve the economy leads to a stronger dollar, which accelerates the economy. And, sometimes, a strong dollar is simply a reflection of an improving economy.

Pros and Cons of a Strong Dollar

Most major currencies in the world float in value relative to each other and are typically measured against the US dollar. With a strong dollar, we can import more goods, which is, in general, great for consumers—cheaper goods—and for US travelers—cheaper travel destinations.

However, US exports suffer because our goods and services are more expensive to foreign buyers. Our competitiveness decreases. This is one of the reasons US manufacturers have been building production facilities abroad; they benefit from lower costs and can remain competitive.

In other words, you may lose your job due to a strong dollar, so you won’t reap much of the benefits from an improved purchasing power.

What Does a Weak Dollar Mean?

If the US dollar is weak, imported goods and services get more expensive, and Americans traveling abroad will find that their trip gets more expensive. On the other hand, US exports will increase due to our increased competitiveness, which can save US jobs and perhaps even lead to increased employment.

In other words: A weaker dollar reduces your purchasing power but may save your job.

A Balancing Act

The consensus among economists, is that maintaining a balance between a strong dollar and a weak dollar is the best for our economy, for investors, and for consumers. Imports remain reasonably priced, and US manufacturers stay competitive.

We cannot end a discussion about the dollar without mentioning that in our opinion, over the next few years the US dollar will become extremely weak, and may crash ( see: https://goldalliancecapital.com/will-the-us-dollar-crash ), which will significantly impact all aspects of the US economy.

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