Strong dollar vs. weak dollar

Strong dollar vs. weak dollar May 18, 2011

“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?

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