Do We Want a Strong or Weak Dollar?

Do We Want A Strong or Weak Dollar?

Lately, news coverage has been talking about how the value of the dollar is sinking all over the world. It's sinking so hard that some are wondering if it will remain the currency of the world for much longer. Ever since the gold standard the value of the dollar in the rest of the world has fluctuated like a stock price. You can actually see how well it's doing relative to other currencies. You can even trade currencies like a stock to make money, or you can simply check on them at websites like Forex.com. The easiest way to see how the dollar is performing in the world market is the US Dollar Index, which is the dollar vs. a variety of currencies. When the dollar is strong, our dollars are able to buy more foreign goods. Americans with a strong dollar are going to be interested in buying foreign goods because we can get them cheaper. This keeps inflation in check and makes the dollar more important to the global economy.

But there is a stipulation. The more money we spend overseas, the less money we spend here in the states. We're basically shipping out our money. This, and a number of other factors, can contribute to the eventual weakening of our dollar. A weak dollar makes importing goods (like oil) more expensive. This creates inflation. But there are good things too. Other countries will find it appealing to buy American goods because they can now get them at a cheaper price. They might look into investing in the U.S., for example a foreign car company setting up a factory in the U.S. (Honda). This brings tons of foreign money back into the US, which stimulates the economy. We also have to consider factors that contribute to the strength of our currency. Yes, the economy is a big factor, but what about the money supply? Right now there are a lot of dollars out there. The more dollars there are the less they're able to buy, so the dollar is devalued on the world market. Political upheaval can be a factor. Not that the U.S. is, but when a country is unstable the citizens may run to the dollar for stability, which strengthens the dollar. Interest rates play a factor as well.

So what kind of dollar do we want? Well, Americans tend to want their cake and eat it too. We want a strong dollar, but we want a weak one too. It just depends on our mood. When our economy is in the dumps, the Federal Reserve will actually devalue our currency in order to encourage foreign investment in the country. They will purposefully devalue our currency, by introducing more cash into the market, which brings foreign money to the U.S. When times are good we want a strong dollar to combat inflation. It's a difficult balancing act that is similar to the argument of whether we should have lower or higher interest rates.

"Although economists have studied the sensitivity of import and export volumes to changes