The Advantages & Disadvantages of a Strong Dollar

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The changing value of the dollar in the global marketplace might not seem to have much to do with your personal finance, but in reality it plays a significant role. If you invest, travel or buy imported goods, the fate of the dollar directly impacts your lifestyle. Even common, everyday items may rise or fall in price simply because of fluctuations in the value of the dollar.

Travel

You'll feel the most direct correlation between a strong dollar and your pocketbook if you travel internationally. A strong dollar means everything you buy overseas will be cheaper. If the euro drops 20 percent against the dollar over the course of a year, for example, a wide swath of European countries, from Spain to France to Germany, will be cheaper for you to visit. A hotel room in Ireland that would have cost you $200 per night last year would only cost you $160 per night this year. Dinner and a show in Paris might only run you $200 instead of $250.

Of course, the reverse is true if you're working overseas or paid by a foreign employer. For example, if you work for a German manufacturing firm and are paid in euros, your paycheck will effectively shrink by 20 percent when you spend that money back in the United States.

Investments

When you invest in stocks, you're owning a piece of a company. Stock prices typically rise and fall with the financial fate of the underlying companies. If a company you invest in does significant business overseas, its earnings are reduced because its products are more expensive to foreign buyers. Companies also lose out when they make sales in foreign currencies and have to convert that money back into U.S. dollars. The result is a net reduction in actual earnings. With reduced earnings often comes a falling stock price. A rising dollar also hurts international investments, both in bonds and in stocks. Generally, the best way to avoid the negative effects of a higher dollar on a stock market investment is to look for domestic companies with little international exposure.

Imported Goods

You don't have to actually travel to benefit from increased overseas purchasing power. Imported goods also cost less here at home when the dollar strengthens. It's not just fancy Italian handbags that may ring up lower at the register either. Many common goods, including everyday clothing and electronics, often are imported and result in a lower cost in the United States when the dollar appreciates. A rise in the dollar also often translates into lower oil prices, meaning it costs less to fill up your tank at the pump.

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