The Economic Impact of a Weak Us Dollar

The economic impact of a weak U.S. dollar is sometimes a matter of perspective.

When news reports refer to the U.S. dollar as "weak," they mean its exchange value has depreciated against the value of other currencies, such as the euro or the Japanese yen. Although a weak dollar reflects a negative judgment on the U.S. economy as a whole, there are some positive effects.

Identification

The threat of inflation is the biggest worry associated with a weak U.S. dollar.

Effects

A weak dollar makes foreign goods and overseas travel more expensive for American consumers and tourists. Foreign firms raise prices to compensate for the cheaper dollar.

Benefits

The declining dollar makes American products less expensive, and therefore, more attractive in overseas markets, which reduces the U.S. trade deficit.

Considerations

For U.S. businesses that serve foreign tourists, the weak dollar has benefits because foreign currencies buy more U.S. dollars.

Potential

As the dollar declines in value against other currencies, foreign investors may become less likely to buy U.S. securities unless the interest rates increase. Higher rates, however, increase borrowing costs for American households and firms, which can slow the economy.

References

• National Public Radio: Is a Weak Dollar Really So Terrible?

Resources

• Federal Reserve Bank of New York: Foreign Currency Exchange