11/20/2004

Record Low Dollar

On Friday, Alan Greenspan warned that two of things that are weakening the dollar - trade deficit and budget deficit - need attention. How does the weak dollar affect us? Rates increase with a weak dollar, meaning the cost of money can affect both us as a consumer and our businesses. Weak rate also lead to a decrease of domestic competitions because goods can be produced cheaper overseas. More imports from Americans can make the problem even worse because it will lead to a larger trade deficit. U.S. companies that buy raw materials and parts overseas will see costs rise in dollar terms. But if they can't raise prices for their products, it could cut into profits and perhaps, hiring. The weak dollar has also hit U.S. consumers by putting upward pressure on oil prices.

Although there are plenty of negative affects from a weak dollar, there are a few positives. Such as, companies that sale overseas have a more competitive market and may see an increase in sales. U.S. tourism is another industry that can increase. Foreigners are more likely to visit since their currencies can buy more here, and U.S. vacationers who might travel abroad are more likely to stay home if dollar weakness makes overseas travel too expensive.

6 comments:

peter_parker said...

Won't domestic firms' sales increase since it is more expensive to buy imports? It's the same effect that you mentioned about U.S. vacations. I wonder if there is any benefit of having a slightly weak dollar. I know that if it becomes too weak problems can arise.

Maudi said...

A weak U.S. Dollar is somthing that we haven't seen in a long time. Trade deficits are good to a certain extent, but once they get to a certain point it is time to figure out how to overcome them. On the otherside of the coin the Euro is at an all time high causing problems for the European firms who want to do business with the U.S. The U.S. firms because of the weakness in their dollar must spend a lot more dollars to get the same amount of goods they were used to getting in the past. The U.S. economy is still recovering from 9-11 and I feel it will be yet a while before the American dollar is back to were we want it to be. It is important as a nation that we continue to find ways to take advantage of a weak dollar, things such as buying here in the U.S. will help keep our economy growing.

Jake said...

The American dollar has been at the top of the currency market because of its consistency and durablibity. I lived in South America for a number of years and each time I would use American currency to buy goods or to exchange for local currency, the person behind the counter would always tuck it away because they knew the greater consistency the American dollar had compared to their own currency. Hopefully the dollar can regain its durability so American companies can continue to be profitable overseas and international companies will continue to invest in American companies.

Dr. Tufte said...

-2 for multiple spelling and grammar mistakes in Miles' post.

-1 for spelling mistakes in Maudi's comment.

I wouldn't worry too much about this. Rates affect demanders and suppliers oppositely. Since the country is half demanders and half suppliers, this is a wash.

Trinity said...

Dr. Tufte said he "wouldn't worry too much." The dollar was at a record low when this post was written. The writer was right on the money. It was a record low at .767 vs. the Euro but is now at .651. Perhaps there was something to worry about. And yes, I realize that everyone has 20/20 in retrospect.

Dr. Tufte said...

Has the proportion of problems you've faced as a result been in proportion to the change in value?

If not, I'd say this isn't that big a problem.