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Politics

Do you even know what weaker/stronger dollar means? - Or do the terms fool you?

Posted: Jan 15th, 2018 - 4:38 am In Reply to: Dollar down 13% since Trump took office - see link

A "strong" dollar isn't necessarily a "good" thing, and a "weak" dollar isn't necessarily a "bad" thing. One benefits some, and the other also benefits some, and the converse is true.

The first thing you need to grasp is that these are entirely relative terms, not qualitative. In ordinary language, "strength" is a good thing, for instance, but not necessarily so in the world of currency exchange. "Weakness" is a negative term in ordinary language, but not necessarily so with reference to currencies.

A weaker dollar, for instance, is of great benefit to our exporters, and what that means is that we are in a better position to reduce our trade deficits with other countries like China. An American product sold in Europe, for instance, is denominated in euros. Sell an American car in Europe for 20,000 euros, and on conversion back to dollars there will be more dollars with a "weaker" dollar than if the dollar were "stronger" against the Euro.

Currency fluctuations are not reflected in the price of the car on the Euroopean sales floor, so the price doesn't change from one minute to the next. The car hits the floor in April, priced at 20,000 euros. The car sells in May when the dollar has "fallen" against the euro. It still sells for 20,000 euros, but those euros received for the car are now worth more dollars in the States.

Meanwhile, prices in the States such as the cost of an hour of labor don't fluctuate with momentary currency fluctuations, either. An hour of labor on the car assembly line that cost $20 in April will still cost $20 in May. The same is true of the cost of machinery on the assembly line, which is a sunk cost and cannot fluctuate at all since it's already been purchased.

But, we now have more dollars coming back against those fixed costs, which means more profit on the sale of the car. Rising profits benefit the company and its stockholders (including ordinary people with 401Ks etc.)

On the other hand, you can show how a weaker dollar is undesirable for other market participants. It just depends on which side of the currency exchange you're on and what kind of global operations you're engaged in. If you're an importer, you want to see a stronger dollar, while exporters like a weaker dollar.

Currency markets and their impact on trade, and the economy generally, are very complex, and I see a lot of people posting nonsense because they jump at words like "weak" and "strong", but they don't know what those terms really mean, or the fact that CONTEXT IS EVERYTHING when trying to decide whether a given currency fluctuation is a "good" thing or not!







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