Yahoo Finance Attention Traders: Three Major Reasons a Weak Dollar is Actually Good for the U.S Economy
The U.S. dollar has been on a predominantly downward trend since the markets opened for trading in January. The decline is a sharp detour from a 15-year high it recorded in the wake of President Trump’s inauguration. In the year-to-date period, the AMEX Dollar Index, which tracks the USD against a basket of rival currencies is down 8.75%, about 2% of those losses happened in the last one month.
In the forex markets, the greenback is down almost 11% against the Euro and about 14% against the Mexican Peso this year. Much of the weakness in the USD can be traced to the unconventional words and economic policies of President Donald Trump. For instance, it is hard to remember the last time a sitting U.S. President said that “I like a dollar that’s not too strong… Lots of bad things happen with a strong dollar.”
In addition, increased economic stability in some other parts of the world such as Europe has reduced the appetite of the USD as a safe haven. Granted, many forex traders might not be comfortable with the decline in the greenback because the weakness eliminates most of the certainty that comes with betting on the bullish nature of the USD against other currencies. Irrespective of what forex traders think, a weak dollar might actually be good for the U.S. economy.
1. A weak dollar drives U.S. manufacturing
A weak dollar is good for the U.S economy because it could theoretically boost manufacturing output. A weak USD will make U.S. exports cheaper in oversea markets; hence, there will an increased demand for U.S. goods. Increased demand for U.S products will in turn spur increased manufacturing activities. Increased manufacturing stateside could in turn have a ripple effect culminating in a more-rounded economic growth. Orlando Wells, an analyst at ECN Capital submits that “economic indicators often show a nice boost to overall economic growth whenever the dollar is weaker in sharp contrast to period of a strengthening U.S. dollar.
2. A weaker dollar increases profits for multinationals
When the U.S. dollar is weak, U.S. firms with huge international exposure can expect to book increased profits from foreign markets. The profits that international firms earn in other currencies such as Yen, Yuan, Euros, Pounds, and other currencies will increase the bottom line because of currency tailwinds when such earnings are converted back to USD. When foreign sales are worth more money in USD, companies reward shareholders in form of share buybacks and dividends. Such rewards in turn attract new investors into the stock market; thereby increasing the liquidity of stocks on Wall Street.
3. A weak dollar can ease the Federal Reserve’s dilemma
The U.S. Federal Reserve has raised interest rates two times this year already and it plans to raise the rates at least once more this year. There are also indications that the fed might raise interest rates about five times next year. However, the unexpected weakness in the inflation rate is putting the fed in an uncomfortable position concerning interest rates. The U.S. Federal Reserve has been shooting for an inflation rate of 2%, a feat it hasn’t been able to achieve in the last five years. However, a weak dollar can cause an increase in the price of foreign imports; thereby providing an uptrend in inflationary trends.
This article was originally posted on FX Empire
