by Adam Netland

The weaker U.S. dollar has become common conversation in recent months. A simple generalization is that “strong” is good, and “weak” is bad. So should we believe that a weaker dollar is bad? Not necessarily. There are disadvantages of a weaker dollar, but there are some advantages as well.

Like the price of most things, the demand for dollars is a result of supply and demand. People demand U.S. dollars so they can buy U.S.-made goods and services, as well as U.S. assets, such as bonds, stocks, businesses and real estate.

Some of the factors that can affect the demand for a currency include: 

• Interest rate levels compared to other countries
• Rates of inflation and anticipated inflation
• Domestic trade deficit / surplus
• Relative strength or weakness in an economy
• Stability in the government and economy  

Now let’s look at some of the advantages and disadvantages of the weaker U.S. Dollar.

Some Advantages of a Weaker U.S. Dollar

• Foreign tourists can more easily afford to visit the U.S.
• U.S. exporting companies have a competitive advantage selling globally.
• U.S. capital markets become more attractive to foreign investors.
• Investing in foreign stocks has provided extra returns due to currency conversion in recent years (Always remember, the past performance is not indicative of the future).

Some Disadvantages of a Weaker U.S. Dollar

• U.S. vacationers find traveling abroad more costly.
• Global commodities such as oil and gold are relatively more expensive.
• U.S. consumers must pay higher prices on foreign products and services.
• Higher prices on imported foreign goods contribute to a higher cost of living.

As you can see there are numerous pros and cons to a fluctuating U.S. dollar. On one hand, there is concern for paying higher prices on goods and services in the U.S., but there is also the potential for investing opportunities domestically and abroad. Depending on where you live or where you are traveling, the strength of the dollar versus other currencies can be either a good or bad thing.