“The Yen has risen to record levels against the dollar.” “The Euro has risen to record levels against the dollar.” These are headlines that we have seen in the press lately, among all of the other financial and economic headlines. What do these headlines mean and do they mean different things to different readers?

First what do weak and strong mean? All of these terms are relative terms, both in relation to another currency and to its relationship to that currency in the past. So, when we hear that the dollar is weak that means it takes more dollars to purchase a unit of another currency than it did in the past; today $1US buys $1.03 Canadian. Just the opposite it true of a strong dollar, it would take less dollars to buy a unit of a foreign currency. Five years ago a dollar would buy $1.33 in Canadian dollars. That is a big difference.

So, who does this affect? Does it only affect those that buy foreign currency to travel abroad or take their US Dollars overseas with them and return with souvenirs?  Well, yes, to an extent. But look at it this way. We all travel abroad each and everyday with our dollars and purchase foreign goods. When you go to the store, pick up something that doesn’t have the Made in America label on it, you are in effect traveling overseas with your pockets full of US Dollars and purchasing foreign goods. Now we can see that the relative value of the dollar and its strength or weakness pretty much affects all of us.
Thinking about traveling to Europe? Now might not be the best time to go, because it is going to take more of your dollars to finance your trip.  Using current prices, and current exchange rates, take a family of four to McDonalds in Paris, buy 4 Big Mac combo meals, and the tab is going to be over $39!  Those same four Big Mac combo meals here in Cleveland is $20.20. The Economist magazine has for years kept a Big Mac index just so people can get a real feel for what all of this currency talk is all about. And everything you see in foreign countries from transportation, accommodations, dining, and on will cost you more today. How much more? Over the past five years the dollar has depreciated 30% compared to the Euro, the common currency for most of Europe.

But think about those Europeans, or Japanese, or other foreigners who currency has appreciated compared to the dollar. The real estate markets in popular American destinations, like New York City, resort areas of Florida, and San Francisco are seeing an influx of foreigners purchasing real estate. Why? Their currency buys more dollars than it did in the past, and real estate in most areas in the US has dropped in value, so our real estate is on sale. They are getting a double advantage. For example, if a property sold for $200,000 2 years ago, and its current price has depreciated to $160,000, using the Euro to purchase the property would be like getting an additional 30% discount on the property, bringing its purchase price to around $112,000.

Some people benefit from a strong dollar, others benefit from a weak dollar. Let’s look at the advantages and disadvantages of a strengthening dollar vs. a weakening dollar.

Strengthening Dollar

 Advantages
 Lower prices on foreign goods & services
 Helps keep inflation low
Cheaper for US citizens travel abroad
US investors can purchase foreign investments cheaper
Disadvantages
US companies' goods/services expensive to foreigners
Foreign tourists face higher price in US
Foreign investors find US investments expensive
 

Weakening Dollar

Advantages
US companies' goods/services cheaper to foreigners
Foreign travelers find US more affordable
US more attractive to foreign investors
Disadvantages
Higher prices on goods/services from outside US
Higher prices on foreign goods translates into higher inflation
Expensive for US residents to travel abroad
US investors find foreign investments expensive
 

If we look at the advantages of a strong dollar, consumers are in a better position with a strong dollar. Since we import so many goods today, a strong dollar makes those foreign goods more affordable.  A strong dollar is better for our consumers thinking about traveling overseas, their dollars go further. A US investor sees his dollar go further when considering foreign investments. Think that only applies to the very wealthy or institutional investors? Does anyone own a mutual fund that holds foreign investments? Now it applies to you.

What about the disadvantages from a strong dollar. The greatest impact to us here in the States, is that the goods and services that companies here produce are more expensive to foreigners. So, our companies find it more difficult to export our soap, greeting cards, lawnmowers, etc.
Now we look at the flip side. A weak dollar impacts US consumers, but in a negative way. All of the foreign goods we import are now more expensive. This is helping contribute to higher inflation. But it benefits companies located here that are trying to sell their goods and services overseas.  It also makes whole companies look attractive; look at the recent takeover of Anheuser-Busch by Belgium’s InBev. Think of the discount InBev is getting in this $52 billion investment using Euros which have appreciated 30% against the dollar. A 30% discount on $52 billion is a lot of money!
 
Lineweaver Financial Group, 9035 Sweet Valley Drive, Valley View, Ohio, 44125.  1-888-313.4009.  Securities offered through Sigma Financial Corporation.  Member FINRA and SIPC.