While it is a major currency, the dollar rises and falls against other currencies in the same way as other currencies rise and fall. While it has short-term volatility, the dollar has been declining since 2002 and has depreciated 40 percent against currencies of many major developed countries. While it is important to consider the impact of a weak dollar on the cost of oil and how a rise in the cost of oil will impact the economy, there are many other factors to take into account. Many investors see the fall of the dollar as a negative situation, but in fact, a weak dollar can result in opportunities for profit.
When the dollar is weak, it’s purchasing power is lower. This results in an increase in the cost of importing oil which leads to higher gas prices and more expensive for the consumer. However, at the same time, US multinational corporations who earn a large percentage of their profits from overseas can actually benefit from the weaker dollar. This is possible because a weak dollar makes US exports more competitive in the global market and more attractive for foreign spending.
As multinationals benefit from a weak dollar so do their shareholders. Investors benefit from capital appreciation and may also benefit from an increase in dividends when the dollar is weak.
As foreign products become more expensive in the US market, there is less competition to local businesses. This can lead to a boost in sales, as well as a boost in production which can lead to an increase in local jobs. With foreign products costing more, consumers will spend more money locally. This allows local companies to raise their prices within the US. In addition, investors may find that domestic companies are more profitable business opportunities than foreign companies, leading to further growth within the US market. This is true for foreign investors, as well, who will be more willing to invest in US companies and real estate when the dollar is weak.
As the dollar falls, the US becomes a more attractive destination for tourists as it becomes more affordable for foreigners. With the contribution of tourism to the economy being between 4% and 11%, depending on how the sector is determined, an increase in tourism is significant not only for specific businesses but for the US economy as a whole. In the same way, as tourism within the US is more affordable to foreigners, vacations abroad become more expensive for Americans. As a result, more Americans choose to go on local holidays and spend their vacation dollars within the country.
The Bottom Line
While many people get nervous when the dollar declines and there are certainly disadvantages to a weak dollar, there are also many advantages. With the many benefits of a weak dollar, it is unlikely that the US government or Federal Reserve would intercede to prevent it from weakening further. While a balance may be preferable, a weak dollar can be beneficial to certain sectors.