What’s Better For Americans – a Strong or a Weak Dollar?

It goes without saying that the global COVID-19 pandemic and the ensuing worldwide lockdown measures saw major disruptions to business. Some operations were forced to a grinding halt and others had to promptly re-invent themselves adapting to “new normals”. Airlines went bust and restaurants had to seek federal assistance in order to weather the tumultuous waters the Corona storm wrought.

Not surprisingly, the turmoil had a serious impact on the foreign exchange rates of all major global currencies from the Dollar to the Pound Sterling to the Yuan. Over the course of the pandemic, the US Dollar, in particular, saw some real dips against its G8 counterparts and of course its economic rival China. Let’s take a closer look at some major currency rates from the last 18 months;

USD to EUR

January 2020 – $1 USD = €0.9078

October 2020 – $1 USD = €0.84

October 2021 – $1USD = €0.8778

USD to GBP

January 2020 – $1 USD = £0.7606

October 2020 – $1 USD = £0.7663

October 2021 – $1USD = £0.7349

USD to CNY

January 2020 – $1 USD = CNY 6.9

October 2020 – $1 USD = CNY 7.06

October 2021 – $1USD = CNY 6.46 

As you can see, the bottom line is that the Dollar in your pocket today gets you less foreign currency than it did pre-pandemic and therefore the dollar has weakened since the outbreak of COVID-19. But what are the reasons for this and what does it mean for ordinary Americans?

Why The Decline?

Firstly, it is important to remember that the decline of the dollar is not exclusively tied to the COVID pandemic. Rather, the dollar peaked at an all-time high in 2008 and was brought crashing down by the global financial crisis started by the collapse of the US subprime mortgage market. This was promptly followed by a resurgent China making larger and larger inroads into the global economy and establishing itself as a worthy rival to US hegemony. Looking at its ‘belt and road project’ and its buying up of western companies, there can be little doubt that Shanghai is making a determined effort to establish the Yuan (CNY) as the global currency.

Its most recent peak was in early 2018, before it once again started to fall. The major driver of this was the tariff wars that the Trump administration entered into with China coupled with global supply.

It is also important to note that the dollar is now showing growth, and the forecast is that it will continue to climb. Therefore there is some chance that by January 2022 it may be edging back to where it was pre-pandemic and the weakened dollar we see today may well be a temporary state of being. Recent developments in China, including the developing Evergrande saga, may see the CNY seriously begin to wobble which will almost certainly mean the dollar booms.  Indeed, even Bank of America’s own analysts has admitted that the dollar’s rise has less to do with the Federal Reserve’s considerable interventions, and everything to do with China.

What This Means For America

The default assumption seems to be that a weak dollar is bad for America and Americans but is this really the case? Just as the economic interests of Wall Street are rarely in tandem with economic interests of ordinary Americans, using the dollar’s value alone as a metric of American economic health is very limiting.

A weakened dollar does limit the political and economic power of the American government and state. When the dollar is riding high, the US can make all kinds of financial overtures to allies, nemesis’ and prospective partners to try and get its way. A strong dollar means more soft power globally which in turn means the US doesn’t need to even consider exercising hard power. 

On the other hand, a weakened dollar means that the US’s foreign budget doesn’t go quite as far as it used to and this risks potential allies and partners being more open to offers from rivals like China than they might otherwise be.

Also, Americans importing goods from outside the country will find that they become more expensive as the dollar falls – this applies whether you are a wholesaler buying French wine by the case, or an Amazon customer buying household goods via the site from the Far East. As import costs rise, the price of imported goods increases on supermarket shelves and many Americans from coast to coast are suddenly finding that their favorite French cheese or Scotch Whisky is now slightly over their budget.

Finally, any US citizens traveling outside of the country (whether on business or vacation) are finding that they are not getting as many peso’s or pounds as they used to. In real terms, foreign travel is now more expensive for Americans.

Is There An Upside?

All considered, the prognosis looks pretty dire all around. But is there a flipside? Are there any positives in a falling dollar?

The short answer is yes. 

From a business perspective, a declining dollar represents a lot of profit-making opportunities. For example, exporters of American goods may suddenly find a whole new market opens up to them as buyers in Mexico, France or even China suddenly find that for the first time, they can afford to buy American. This may prove to be a temporary benefit and a rising dollar may mean these avenues soon close off. On the other hand, some new customers may simply get a taste for American goods and continue to trade even when the dollar rebounds.

A falling dollar is also something of an absolute bonanza for multinationals who have operations around the globe. For example, Starbucks is well placed to move all of their profits from the Euro-zone back to the US and take full advantage of the decline in the dollar exchange rate. This phenomenon is perhaps best illustrated by tracking the share prices of McDonald’s – shockingly, the mega-corporations profits soar as the dollar falls, and their profits fall as the dollar rises. Indeed Fundstrat Global Advisors’ Mark Newton, speaking on CNBC, recently pointed out that a lot of American industrials have become reliant on a weak dollar to maximize the value of overseas markets.

And what about ordinary Americans? Do they gain any benefits from a falling dollar? Well, if they have shares in multinationals or export companies then they may reap higher dividends. Also, Americans working across the world may find that this the ideal time to start sending money back home and get it banked or invested. 

But let’s be honest, most Americans don’t have shares and don’t earn money in foreign currencies. The only thing they can hope to gain from this is the ‘trickle down’ effect. Bigger profits for big companies may result in more job creation in the US and a fall in the price of US goods may result in an increase in manufacturing jobs – however, this won’t happen in the short term.