What Does a Strong U.S Dollar Mean for the Economy?

Q: I’m hearing that the U.S. dollar is getting stronger. What does this mean for the economy and for me?

A: A strong U.S. dollar has a major impact on all parts of the economy, but its exact ramifications can be confusing. Here’s all your questions on a strong U.S. dollar–answered.

What does a strong U.S. dollar mean?

When the dollar grows stronger, its purchasing power in foreign countries increases. You can now buy more of another currency with this dollar than you could a year ago. For example, the euro, which is used by 19 European countries, reached a 1:1 ratio with the dollar this year for the first time since 2002. 

Why is the dollar growing stronger?

The U.S. dollar is strong because the U.S. economy is healthier than the economy of most developing nations around the world. In addition, the Federal Reserve has raised the national interest rate several times over the past year, further increasing the dollar’s strength.

What are some advantages of a strong dollar?

• Cheaper overseas travel. A strong dollar can buy more goods when converted to a local currency while abroad.
• Lower cost of living for expatriates. U.S. citizens who are living and/or working abroad while getting paid in U.S. dollars will see the cost of their day-to-day expenses decrease.
• Cheaper imports. Goods produced overseas and imported to the U.S. are now less expensive. 
• Multinationals doing business in the U.S. are earning more. Foreign companies earning income in dollars will now be earning more profits.

What are some disadvantages of a strong dollar?

• U.S. tourism is more expensive. With foreign currencies trading in for fewer U.S. dollars, traveling to the States is now more expensive for foreigners. This can have a negative effect on the tourism industry in the U.S. and beyond. 
• U.S. exports are more expensive. Goods being produced in the U.S. and sold abroad now cost more. 
• U.S. companies doing business abroad are earning less. U.S. companies earning income in any currency other than U.S. dollars, and then converting this income to dollars, are turning a lower profit now. 

Will the U.S. dollar continue to be strong for the foreseeable future?

Economists predict that foreign goods, being so inexpensive now, will soon rise in demand, thus raising their prices. Concurrently, domestic exports will decrease in price as demand for these items declines. Ultimately, they expect an equilibrium to be achieved and for the U.S. dollar to stabilize in strength at that time. The dollar has already begun to drop in value, but it’s anyone’s guess as to when it will stabilize completely. 

Your Turn: Are you taking advantage of the strong U.S. dollar to travel abroad, invest in exports or in any other way? Tell us about it in the comments.