(TNS)—The “strong dollar” is making headlines. What is a strong dollar, and how does it impact us?
The dollar is “strong” in value relative to other currencies because global investors have choices about how to hold their wealth. They have been choosing to exchange their currencies for dollars. They’re worried about the future of the euro, given the slowing economy in the Eurozone. And since Japan is printing money to get its economy going, they don’t want to hold Japanese yen. The Canadian dollar is relatively weak because Canada’s economy is dependent on energy prices. And no one wants the Russian ruble anymore. So the dollar has gained value relative to most global currencies as a “safe haven” for wealth.
We Americans live in U.S. dollars, shop in dollars, invest in dollars—so how does the strong dollar help (or hurt) us? The strong dollar means:
1. Imports are cheaper. One dollar, for example, can buy more euros’ worth of products, whether French wine, German cars (the ones made in Europe) or Japanese electronic components. So our dollar goes farther when buying products made in these countries.
2. Travel abroad is more attractive. If you still want to go to France, Italy or Greece, your strong dollar will buy more in terms of hotel rooms and dining out.
3. Your energy prices are lower. The U.S. is becoming more energy independent, but we still import a lot of oil. And global oil is priced in dollars. Once again, the strong dollar buys more.
4. Interest rates are lower. With all that global money coming to America, the Fed can borrow at lower rates to finance our deficit — and you can borrow at low rates to get a mortgage.
5. Business gains confidence and creates jobs. Money invested in America helps create a climate of growth that benefits both business and labor — and the stock market.
Of course, there are some negative effects to a strong dollar. Multinational companies (think Coca-Cola or McDonalds) that earn money abroad find it translates into lower profits at home because of the exchange rates. And companies that export to the rest of the world find themselves priced out of foreign market, cutting into their business. Plus, savers hate low rates offered by banks and money market funds.
But the strong dollar is a signal that the world views the United States as the safest place to stash their cash—a very good sign indeed. And that’s The Savage Truth.
Terry Savage is a Registered Investment Advisor, blogger and the author of four best-selling books, including “The Savage Truth on Money.”
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