The Major Pros & Cons of a Strong Dollar

The Major Pros & Cons of a Strong Dollar

The US economy is stronger than it has been in years. The financial crisis of 2008 is finally behind us, and the strength of the US dollar can’t be ignored. But what does a strong US dollar mean for the US and the rest of the world? Trading 101 teaches that there are always two sides to a coin, and it is important to know all the facts to make the best move.

There are advantages and disadvantages when it comes to a strong US dollar, and the way you look at it will depend on your market, industry, and location. Here are the top pros and cons of a strong dollar.

Pro: Foreign Companies in the US Will See Gains

Many multinational corporations that originated outside of the US have strong bases within the US, one of the world’s biggest markets. A strengthening of the dollar pays good dividends for these corporations, with rises in the dollar translating directly onto balance sheets. Both the corporation and its investors should reap the gains of a stronger dollar. Furthermore, this will encourage more international corporations to continue trusting the US as a sustainable and profitable market.

Con: US Companies That Trade Abroad Will Suffer

Unfortunately, a strong US dollar means that domestic companies in the US that rely heavily on business with foreign corporations and foreign markets will experience overall losses. This is because a stronger US dollar results in lesser value earned from foreign currencies; the more foreign currency a US business earns, the harder a weaker global market in relation to a rising US dollar can hit their balance sheets. This results in US companies pulling themselves away from international markets, or waiting for the currency to settle from its spike.

Pro: Cheaper Imports

The best goods aren’t always (or even usually) produced in the US, which means a lot of items on our shelves come from abroad, including those owned by US companies. As the US dollar rises in value, so too does it become easier for manufacturers to ship products here, as their products will fall in price in relation to the US dollar. This allows the average American consumer to keep more of their disposable, resulting in a healthy injection of buying on the market.

Con: More Expensive Exports

With a stronger US dollar, it makes it more difficult for foreign markets to purchase the goods and products that we produce. If a car made in the US costs $30,000, an exchange rate of $1.35 for each euro would effectively price it a €22,222. However, if the dollar strengthens and rises to an exchange rate of $1.12 for each euro, this would result in the same car now costing over €4,000 euros more. While this may not affect Americans directly, it can result in the global market shying away from US-made products. This could possibly lead to thousands of Americans losing their jobs.

Pro: Travel Abroad for Cheaper Rates

With a stronger US dollar, Americans can do more with each dollar outside of the US. Stronger buying power means you can experience more with your travel funds, allowing you to experience vacations that might have been too expensive in the past. Living abroad also because becomes more affordable and more convenient.

Con: US Tourism Takes a Dive

As the dollar rises in value, it becomes more difficult for foreign tourists to travel around and experience the US. They are forced to exchange more of their local currency for the same amount of US dollars. Historically, the tourism industry has always decreased in accordance with the rise of the US dollar.