If you watch much financial media you have probably heard the term currency wars used relatively often during the last few months, and China of course has been labeled a “currency manipulator” by some groups for years. Exchange rates, relative values…all very interesting if you like that kind of stuff, but what does any of it have to do with you?
Governments have several tools available to them if they are trying to improve the economic performance of their country, and the strength of their currency is one of them. Depending on what the specific goals of the nation are at that time the government may choose to weaken or strengthen the currency: what does that mean?
In plain English, if the government decides to strengthen the currency, the citizens of that country have increased purchasing power if they decide to buy goods that are produced elsewhere and imported to the U.S. In other words, you can buy more stuff that is manufactured elsewhere because your dollars are worth me, relatively speaking. A weakened currency has the opposite effect; your dollars are worth relatively less, and so you cannot purchase as much stuff.
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Strong dollars help consumers but hurt exporters – it takes more foreign currency units to purchase stuff manufactured in U.S. dollars that it did previously. Weak dollars hurt consumers by help exporters (opposite of strong dollars), so it is really can be summarized as a trade off as to what sector of the economy will benefit at the expense of the other. Additionally, a strong dollar might encourage, or even create, trade deficits due to the effects described above – more purchases of goods combined with less exports is a good recipe for a trade deficit.
So, shouldn’t a weak dollar policy be followed? Well, that comes with its own problems – if everything costs more and salaries do not increase, the quality of living decreases, but if employers begin matching salaries to increases in costs there is always the chance that inflation could accelerate to levels that are destructive.
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Definitely a delicate balance to maintain.
What do you think?
King Dollar or Export Dollar?
