At a time when the
Benefits of a Weaker Dollar
1) Increased Exports –
One of the biggest
reasons why a weaker dollar will help the
2) Foreign Investment –
There are three
different ways that foreign investment can help the
3) Increased Tourism –
Tourism represents a
big part of the
Disadvantages of a Weaker Dollar
1) Higher Costs for Foreign Goods –
The most immediate
disadvantage of a weaker dollar is the increased costs for foreign goods. With a trade deficit of $59.2 billion, US
consumers import far more than they export. The number one country that the
2) Tighter Monetary Policy – Higher costs for foreign goods imports inflation which is why a weaker currency in general is inflationary. With oil prices hovering around $80 a barrel and the dollar falling through the floor, inflation is sure to pick up in the coming months. Martin Wolf of the Financial Times makes a fantastic point when he said that “The resolution of each crisis lays the seeds of the next.” In order to get out of a crisis, the Federal Reserve will usually lower interest rates aggressively. We saw this after the Asian and Russian crises of 1997 and 1998. This eventually led to bubbles in the financial market, forcing the Fed to hike interest rates. Although inflation is not a huge problem at the moment, the threat of inflationary pressures could prevent the Fed from lowering rates as much as they would have otherwise wanted or needed.
3) Foreign Travel Becomes More
Expensive – From a
consumer level, the weakness of the US dollar makes foreign travel more
expensive, particularly to countries like Europe and
Can the US Dollar Fall Further?
The answer is yes. A trend in the currency market can last
far longer than many people would otherwise expect. We have seen one way
directional moves last for months and in some cases, even years. Interest rate outlooks play a major role
in the future direction of currencies so with the market pricing in another
125bp of easing by the end of next year, the US dollar could easily fall to 1.50
against the Euro. This is
especially true if the ECB remains nonchalant about the Euro’s move. At some point, the benefits of a weaker
dollar such as increased exports and foreign investment will help to turn the
What Does This Mean for Your Investments?
Regardless of whether you are actively involved in the currency market or monitor it at all, the value of the US dollar or currencies does matter. Companies that do a lot of foreign sales will benefit the most because their foreign currency revenue will be higher when repatriated not because they sold more goods, but because their earnings from currency conversion will be larger. The industries with the greatest foreign sales exposure are energy, technology and consumer staples. Companies that produce commodities usually also benefit from dollar weakness while the companies that will be hurt the most are big importers. If you have a view on where the US dollar is headed or want to hedge against some of your stock market exposure, the purest way to do so would be through trading or investing in the US dollar directly in the currency market.
By Kathy Lien, Chief Strategist
By Kathy Lien, Chief Strategist of DailyFX.com
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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