It is widely known that the dollar is weak against the euro right now. But this week, the dollar reached a 15-year low against the Japanese yen after the minutes of the Federal Reserve’s September meeting were released (Businessweek.com). The dollar is not of equal value with several other currencies as well. With an apparent loss of buying power, the dollar poses both problems and opportunities for the U.S. economy.
What exactly does it mean when the dollar is weak? Well, let’s use the euro as an example. If you take a dollar bill to a European nation and exchange it for euros, the amount of money that you would receive for your dollar is 0.7165 euros (as of today). In other words, you are not getting an equivalent value for your dollar — you’re getting less. The result of getting less is that you have to pay more to get what you want. So how can this be a good thing?
When the dollar is weak, it makes exports to other countries cheaper, which shrinks the trade deficit. Foreign countries are more likely to buy from American manufacturers than anyone else since they can get more for their money. Likewise, the U.S. tourism industry enjoys an increase from foreign visitors. What was once an expensive destination for them has become about 30 percent cheaper, in the case of the euro. And who doesn’t love a discount?
On the down side, the things that we import from other countries cost more for America (i.e. oil). In some cases, the prices are raised because foreigners do not want to lose money against the weak dollar. In addition, the opposite effect of traveling overseas occurs for Americans than was mentioned above. It now becomes very expensive for us to visit foreign countries. That 30 percent discount for foreigners becomes a 30 percent increase in cost for Americans.
What, if anything, should be done to fix the weak dollar? Some argue that the dollar should be allowed to deflate, as it creates jobs and reduces the trade deficit with other countries. Others state that we should impose taxes on our exports or raise interest rates on U.S. Treasury bonds for foreign investors. But that could mean more problems for Americans, as we receive the brunt of those decisions via higher interest rates on loans. There is no obvious answer for solving the weak dollar, and history has proved unhelpful in providing solutions. With every action there is a reaction, and that is the problem that we face today.
Catarina Saraiva, Dollar Drops Toward 15-Year Low Versus Yen After Fed Minutes, Businessweek
Eric Weiner, Is a Weak Dollar Really So Terrible?, NPR