The Weak Dollar: A Good Thing?
If asked which is better, a strong dollar or a weak one, most Americans would automatically vote for a strong dollar. We're used to thinking that bigger and stronger must be better, and it just feels good to see our currency rated higher than the yen or the euro. It feeds our inner urge to be the best at everything.
The problem is that most of us don't think past strong = good and weak = bad unless we're traveling to some exotic land where conversion rates come into play. It doesn't take even the most economically-challenged tourists long to discover that a strong dollar means that they can buy more as roam they the local markets. The same financial rules that translate into vacation bargains can lead to trade deficits, economic trouble, and job losses at home.
If that thought comes as a surprise, you're not alone. According to Philip at Weakonomics.com, "International trade is an economic subject often ignored in traditional economics," and, "For most people in the US, it's the biggest thing you've never thought about." Many people were surprised when President Obama was confronted in South Korea by an accusation that the US was working hard to deflate the dollar to manipulate trade balances, the very same accusation that was made by US officials against China.
Why would the US government try to deflate the dollar when they've been spending so much money in attempts to stimulate the economy? The truth is that currency is part of every country's fiscal policy, and every government openly manipulates the value and exchange rates in an effort to protect their internal economic system. The next time you hear a politician promise to do something about the weak US dollar, don't pay too much attention. It's a great strategy to gain voter approval, but he or she knows it's not always the best policy.
A weak dollar at home is one of the best ways, in the short term, to stimulate growth and increase the Gross Domestic Product. It generally means that anything with the good old "Made in the USA" label is cheaper for foreign countries to buy, and American exports will increase. In theory, this means that foreign funds flow into the country, domestic production increases, and jobs are added. Just as a weak dollar brings more foreign tourists to US shores, it also means that foreign investors flock to the US stock market. This increased demand can be the start of an upward trend in stock prices.
Now that you're convinced of the value of a weak dollar, the next logical step is to think that the dollar should always be weak or that it should be as weak as possible. The problem with this idea is that a weak dollar is only a short term solution to a slow economy. In the long run, a weak dollar causes inflation. We all know that inflation isn't good for most of us, and runaway inflation could quickly lose all that the weak dollar gained in the first place.