Want to watch someone’s eyes rapidly glaze over at a holiday party? Just start talking about how the dollar is falling against other world currencies. Most people don’t understand what that means. They don’t care either because they don’t understand how or why it affects them. They just assume that when something falls, or goes down, it’s bad. But is it?
Here’s a real definitive answer – it depends. Long-term a strong dollar is a sign of a healthy economy. However, in the short-term there are good and bad effects.
Most people do understand that when the dollar falls in relation to the Euro, Yen, and other currencies the price of imported goods will rise. Much of the recent rise in oil is the result of the falling dollar. Foreign automobiles will be more expensive as will all other goods brought into this country.
A weak dollar can cause other countries to lose confidence in the United States as well. The dollar has long been the world’s reserve currency. That position gives this country a lot of leverage in world affairs. Lately there has been talk of stripping the dollar of that status. The average person isn’t concerned about that, but it’s not good.
The positive impact of a falling dollar is that goods produced here have become cheaper to the rest of the world. If foreigners purchase more goods from the United States it helps our domestic economy. It also makes this country more attractive to foreign visitors because their money goes further and that is good for tourism.
If goods produced abroad have become more expensive it makes domestic goods more attractive to Americans. If they spend their money at home it can help pull this country out of the recession. Foreign travel has become more expensive and that also encourages Americans to vacation in their own country rather than spend their money overseas.
But what about real estate? Let’s assume you purchased a home just before the bubble for $100,000. You’ve watched the value skyrocket only to come plummeting back down to the same price you paid for it. To you the price hasn’t changed. However, in that same time the dollar has lost about half its value to major foreign currencies. That means that an overseas investor will see this as a bargain since, to them, the price is 50% of what it was.
So what you say? That means increased foreign demand for US real estate. That can help stabilize prices here and actually help them increase. So while there may be storm clouds on the horizon, such as inflation and higher interest rates, the short-term isn’t all bad.
A weak currency is the sign of a weak economy, and a weak economy leads to a weak nation. – Ross Perot