Problems with a Strong Dollar

drawbacks of dollar

A strong U.S. dollar has both advantages and disadvantages. Others suffer as a result, while some people benefit.

In the foreign currency market, the dollar is said to be strong when it gains value relative to other currencies. More foreign currencies can now be bought thanks to the stronger U.S. dollar. A strong dollar, for instance, benefits Americans who travel overseas but disadvantages foreigners who visit the United States.

Tourism to the U.S. is more expensive.

With a higher dollar, foreign visitors will discover that American goods and services are more expensive. Business travelers and foreigners who live in the US but maintain bank accounts in their home currencies or receive paychecks in those currencies will suffer, and their cost of living will rise.

US Businesses Operating Abroad Are Hurt

Companies with headquarters in the United States that do a significant amount of business abroad will suffer as the value of the revenue they generate from international sales will fall on their balance sheets. Investors in these businesses are likewise probably to suffer.

Well-known examples of US businesses having a sizable portion of sales coming from abroad include McDonald’s Corp. (MCD) and Philip Morris International Inc. (PM). Although some of these businesses employ derivatives to limit their currency risks, not all do, and those that do may only do so partially.

Negative Effects on Emerging Market Economies

Foreign nations that need US dollar buy sell reserves will ultimately pay a disproportionately higher price for those currencies. In emerging market economies, this is especially crucial.

Conclusion

According to economic theory, currency swings will eventually return to the mean because cheap imports should result in higher prices due to increased demand. A level of equilibrium exchange will eventually be reached, but not before pricey domestic exports will have to decrease in price as global demand for them diminishes.

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