Strong dollar vs. weak dollar

“Strong” usually means good, and “weak” usually means bad.  Ezra Klein says that those positive or negative connotations shouldn’t necessarily apply to the dollar:

Sometimes, of course, a strong dollar is in our best interest. And over the long run, a strong economy will produce a strong dollar. But there are moments when stronger isn’t better. Moments like, well, this one.

The dollar’s “strength” or “weakness” is relative. “A strong dollar means that when you exchange it for another currency, you get a lot of that other currency for a single dollar,” says Josh Bivens, an economist at the Economic Policy Institute. A weak dollar, of course, implies the reverse.

That’s . . . it. In practice, a strong dollar makes foreign goods cheaper and domestically produced goods more expensive. That’s a boon for American consumers, American travelers and countries that export to America. In fact, when you hear that China is manipulating its currency, that’s a reference to its efforts to keep the dollar strong and the yuan weak. As far as China is concerned, a strong dollar means a strong China.

A weak dollar, meanwhile, makes American-made goods cheaper on the world market and foreign-produced goods — including commodities, like oil — more expensive. That’s a boon for American manufacturers and people in other countries who want to buy American goods or come visit the country. The very crude way to put it is that, in the short term, a stronger dollar is good for buying stuff and a weaker dollar is good for making stuff.

What a temporarily weak dollar is particularly good for, however, is recovering from a deep recession. “If domestic demand is weak,” says Barry Eichengreen, an economist at the University of California at Berkeley, “the normal way an economy reacts to that is by substituting export demand, and a more competitive dollar is the way that happens.”

The same goes for deficit reduction, Eichengreen says. That’s because cutting government spending reduces domestic demand, and so you need to find new sources of demand to avoid a recession. The way countries customarily do that is to weaken their currencies to make their exports more competitive.

You can probably see where I’m going with this. We happen to be simultaneously trying to recover from a recession and reduce the deficit. But the value of the dollar, though low historically, is higher than you might expect: It shot up after the financial crisis, as anxious investors loaded up on Treasury bonds, and returned to its pre-crisis level only recently. But the economy is much weaker now than it was then, and America much more in need of an export boom.

The irony is that although in the long run, a healthy, productive economy will lead to a stronger dollar, getting there probably requires a temporarily weaker dollar.

via ‘Strong dollar’ doesn’t make sense – The Washington Post.

Do you think this is a correct analysis?

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

  • http://necessaryroughness.org Dan at Necessary Roughness

    Since the function of a currency is a medium of exchange, it almost seems like this could be compared to controlling the weather with a thermometer. :) The fact that George Soros made his money betting on currency shifts is an aberration we can’t count on for the rest of the country.

    We need to get back to basics: instead of relying on government to create a trade advantage through the law, work on maximizing the stuff we are good at and trading for the stuff that someone else is better at making. We can unleash our agriculture instead of relying on federal subsidies and paying people not to perform, for starters.

  • http://necessaryroughness.org Dan at Necessary Roughness

    Since the function of a currency is a medium of exchange, it almost seems like this could be compared to controlling the weather with a thermometer. :) The fact that George Soros made his money betting on currency shifts is an aberration we can’t count on for the rest of the country.

    We need to get back to basics: instead of relying on government to create a trade advantage through the law, work on maximizing the stuff we are good at and trading for the stuff that someone else is better at making. We can unleash our agriculture instead of relying on federal subsidies and paying people not to perform, for starters.

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  • SKPeterson

    What Klein is missing is that there are lags in the movement of these dollars throughout the economy and that a weak dollar often hurts the poor and those on fixed incomes as well as import-using firms. They end up paying higher prices, and when inflation (which is what a weak dollar is) gets going, those on the lower end of the economic ladder are the first to see their day-to-day costs of living rise and their wages to lag behind. Also, generally a strong, stable dollar is more conducive to long-run economic growth as it allows a stable basis for firms to account for prices of inputs and outputs and plan accordingly for investment, depreciation, and wages.

  • SKPeterson

    What Klein is missing is that there are lags in the movement of these dollars throughout the economy and that a weak dollar often hurts the poor and those on fixed incomes as well as import-using firms. They end up paying higher prices, and when inflation (which is what a weak dollar is) gets going, those on the lower end of the economic ladder are the first to see their day-to-day costs of living rise and their wages to lag behind. Also, generally a strong, stable dollar is more conducive to long-run economic growth as it allows a stable basis for firms to account for prices of inputs and outputs and plan accordingly for investment, depreciation, and wages.

  • WebMonk

    Strong and weak dollars aren’t inherently bad or good things – they have advantages and disadvantages which can be of greater or lesser importance depending on the situation.

    A strong economy will typically bring about a stronger dollar/ruble/yen/etc but that does not mean that a stronger monetary unit is inherently better.

    Klein has a couple side details that I might quibble over, but his description of the effects of strong and weak currencies is pretty solid. Hardly exhaustive (not intended to be), and SK’s notes are all right-on. I suspect Klein would also largely agree with SK, but as this topic has had hundreds of books written on it, I don’t expect Klein to cover every aspect in an article.

  • WebMonk

    Strong and weak dollars aren’t inherently bad or good things – they have advantages and disadvantages which can be of greater or lesser importance depending on the situation.

    A strong economy will typically bring about a stronger dollar/ruble/yen/etc but that does not mean that a stronger monetary unit is inherently better.

    Klein has a couple side details that I might quibble over, but his description of the effects of strong and weak currencies is pretty solid. Hardly exhaustive (not intended to be), and SK’s notes are all right-on. I suspect Klein would also largely agree with SK, but as this topic has had hundreds of books written on it, I don’t expect Klein to cover every aspect in an article.

  • WebMonk

    Dan, in this case you really can affect the “weather” with the “thermometer”. By setting policies up in the right/wrong way, a government can seriously impact the economy (weather) by changing the strength of the currency (thermometer).

  • WebMonk

    Dan, in this case you really can affect the “weather” with the “thermometer”. By setting policies up in the right/wrong way, a government can seriously impact the economy (weather) by changing the strength of the currency (thermometer).

  • http://www.bikebubba.blogspot.com bike bubba

    While a weak dollar may attract investment by reducing prices for our goods and capital, it’s worth noting that FDR’s weak dollar policies in the 1930s, and Obama’s today, didn’t exactly cure the recessions going on at those times. A weak dollar is merely a symptom of other things going on, and hence intentionally weakening it or strengthening it does nothing to help the economy. In general, it simply sends a false signal about the economy that will tend to make the situation worse.

  • http://www.bikebubba.blogspot.com bike bubba

    While a weak dollar may attract investment by reducing prices for our goods and capital, it’s worth noting that FDR’s weak dollar policies in the 1930s, and Obama’s today, didn’t exactly cure the recessions going on at those times. A weak dollar is merely a symptom of other things going on, and hence intentionally weakening it or strengthening it does nothing to help the economy. In general, it simply sends a false signal about the economy that will tend to make the situation worse.

  • DonS

    A strong currency usually follows a strong economy, unless the government is manipulating its currency to serve political or economic ends, such as to boost exports by weakening its currency to make things cheaper for foreign purchasers. In general, a strong currency is better because it tamps down inflation and protects the poor and those on fixed incomes. Since we import so much foreign oil, which is denominated in dollars, it is very difficult for a weaker dollar to help us with trade imbalance. Yes, it may drive more exports of goods and services, but the increased costs of importing more expensive oil will largely offset those increased exports. So, the only real advantage is perhaps a more robust economy providing the goods and services for export. But, this increased activity may be offset by reduced spending by Americans struggling to pay more for essentials such as food, fuel, and utilities.

    A real disadvantage attendant to a weakened U.S. dollar is that it encourages foreign governments to dump their dollars, and strengthens the movement to dislodge the dollar as the de facto world currency, for purposes such as pricing oil.

    Bottom line — generally, we are far better off with a strong dollar rather than a weak one.

  • DonS

    A strong currency usually follows a strong economy, unless the government is manipulating its currency to serve political or economic ends, such as to boost exports by weakening its currency to make things cheaper for foreign purchasers. In general, a strong currency is better because it tamps down inflation and protects the poor and those on fixed incomes. Since we import so much foreign oil, which is denominated in dollars, it is very difficult for a weaker dollar to help us with trade imbalance. Yes, it may drive more exports of goods and services, but the increased costs of importing more expensive oil will largely offset those increased exports. So, the only real advantage is perhaps a more robust economy providing the goods and services for export. But, this increased activity may be offset by reduced spending by Americans struggling to pay more for essentials such as food, fuel, and utilities.

    A real disadvantage attendant to a weakened U.S. dollar is that it encourages foreign governments to dump their dollars, and strengthens the movement to dislodge the dollar as the de facto world currency, for purposes such as pricing oil.

    Bottom line — generally, we are far better off with a strong dollar rather than a weak one.

  • SKPeterson

    WEbMonk – monetary policy is kind of like letting the value of a degree Fahrenheit to float relative to a degree Kelvin or degree Celsius.

  • SKPeterson

    WEbMonk – monetary policy is kind of like letting the value of a degree Fahrenheit to float relative to a degree Kelvin or degree Celsius.

  • WebMonk

    SK, not a bad analogy. I’m not sure it’ll catch on, but I like it.

  • WebMonk

    SK, not a bad analogy. I’m not sure it’ll catch on, but I like it.

  • Porcell

    The truth is that a huge problem for the US is its trade deficit which is financed by borrowed foreign dollars. The only way given present economic reality to change this dynamic is through a weaker dollar, however politically embarrassing. Just now American manufacturers are benefiting from the weak dollar.

    We could strengthen the dollar by having less of the present profligate federal government debt. In fact the combination of the trade and federal deficits have led the nation quite close to a disastrous debt crisis due to both the dollar and Treasury notes having become quite fragile. That’s why Bill Gross, the world’s largest bond trader has bailed out and even shorted US Treasury notes.

    What’s really needed is a competitive as opposed to strong or weak dollar. For a summary of this argument read martin Feldstein’s articleThe Case for a Competitive Dollar.

  • Porcell

    The truth is that a huge problem for the US is its trade deficit which is financed by borrowed foreign dollars. The only way given present economic reality to change this dynamic is through a weaker dollar, however politically embarrassing. Just now American manufacturers are benefiting from the weak dollar.

    We could strengthen the dollar by having less of the present profligate federal government debt. In fact the combination of the trade and federal deficits have led the nation quite close to a disastrous debt crisis due to both the dollar and Treasury notes having become quite fragile. That’s why Bill Gross, the world’s largest bond trader has bailed out and even shorted US Treasury notes.

    What’s really needed is a competitive as opposed to strong or weak dollar. For a summary of this argument read martin Feldstein’s articleThe Case for a Competitive Dollar.

  • http://www.thirduse.com fws

    i think what peter/porcell says is about right.

    I am living here in brasil on a largely american income. the dollar was worth 2.5 of the brasilian currency at the start of 2009 and has been downhill ever since. it is now about 1.5 that is a huge drop.

    for those who have traveled alot overseas, the exchange rate does not really tell the whole story. the whole story is about relative buying power.

    here is how that works: the dollar is dropping because the american financial fundamentals are weak. if that were the only factor, then the drop in the value of the dollar would represent a drop in buying power for me here in brasil.

    but on top of that situation, the brasilian currency is also getting stronger. why? all the brasilian financial fundamentals are on the upswing. brasil is experiencing a moderate boom. that is evident just as it would be in the usa. stores and restaurants are remodeling. people have extra money to remodel or buy a few luxuries they could not before. so it is a real boom that is raising everyones boats. so that means that I am losing even more buying power.

    if brasil and the usa were the only countries in the world, the effect of the dollars weakness or strenght would be 1 to 1. but “competative
    ” really does mean just that. the world is flooded with dollars. people are still locking those dollars up as investments. as soon as people look to sell dollars to invest in other currencies, then things will really really start to get complicated for the usa.

    the usa is floating on past glories I am saying. the dollar is still the replacement for the gold standard. when that situation changes (which I dont think will happen for a while), then the usa will compete on a level playing field with the value of other currencies. for now the dollar is a super currency. it is like no other. and with the current problems in europe, it will remain that way , and since the chinese currency is not freely traded that cannot become the replacement.

    what this means is the the usa needs to wake up and smell the coffee and realize that the dollar will not permanently be the gold standard replacement. and so the usa needs to invest and save and make the underlying fundamentals that value their currency truly sound. that probably wont happen. it is a non starter. for both republicans and dems trying to win the current election cycle. so at the end globalization will end up dictating american financial policy. God makes things happen one way or the other at the end.

  • http://www.thirduse.com fws

    i think what peter/porcell says is about right.

    I am living here in brasil on a largely american income. the dollar was worth 2.5 of the brasilian currency at the start of 2009 and has been downhill ever since. it is now about 1.5 that is a huge drop.

    for those who have traveled alot overseas, the exchange rate does not really tell the whole story. the whole story is about relative buying power.

    here is how that works: the dollar is dropping because the american financial fundamentals are weak. if that were the only factor, then the drop in the value of the dollar would represent a drop in buying power for me here in brasil.

    but on top of that situation, the brasilian currency is also getting stronger. why? all the brasilian financial fundamentals are on the upswing. brasil is experiencing a moderate boom. that is evident just as it would be in the usa. stores and restaurants are remodeling. people have extra money to remodel or buy a few luxuries they could not before. so it is a real boom that is raising everyones boats. so that means that I am losing even more buying power.

    if brasil and the usa were the only countries in the world, the effect of the dollars weakness or strenght would be 1 to 1. but “competative
    ” really does mean just that. the world is flooded with dollars. people are still locking those dollars up as investments. as soon as people look to sell dollars to invest in other currencies, then things will really really start to get complicated for the usa.

    the usa is floating on past glories I am saying. the dollar is still the replacement for the gold standard. when that situation changes (which I dont think will happen for a while), then the usa will compete on a level playing field with the value of other currencies. for now the dollar is a super currency. it is like no other. and with the current problems in europe, it will remain that way , and since the chinese currency is not freely traded that cannot become the replacement.

    what this means is the the usa needs to wake up and smell the coffee and realize that the dollar will not permanently be the gold standard replacement. and so the usa needs to invest and save and make the underlying fundamentals that value their currency truly sound. that probably wont happen. it is a non starter. for both republicans and dems trying to win the current election cycle. so at the end globalization will end up dictating american financial policy. God makes things happen one way or the other at the end.

  • DonS

    FJU: Excellent points.

    It would also help if the U.S. were to invest in its own resource development, rather than Brazil’s: http://online.wsj.com/article/SB10001424052970203863204574346610120524166.html

  • DonS

    FJU: Excellent points.

    It would also help if the U.S. were to invest in its own resource development, rather than Brazil’s: http://online.wsj.com/article/SB10001424052970203863204574346610120524166.html

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