The term weak is probably something you wouldn’t want to be associated with. However, in the foreign exchange market, it may not have to be the case since the weak US dollar is said to be a sword: a double-edged sword. While it can make currencies’ price way out of your league, it can also cause domestic currencies to be much more affordable in international markets. In other words, the dollar’s weakness isn’t always a bad thing. So, why worry too much?
Here are the 6 facts:
- Although some economists, namely Adolfo Laurenti and Axel Merk, among others, are afraid that it can affect the rate of economic growth, the weak US dollar can contribute to the foundation of a strong US economy in the long run.
- Although its value can be low historically, the weak US dollar is more valuable than many currencies worldwide. The list includes Bahrain Dinar (2.65 USD = 1 BHD), British Pound (1.52 USD = 1 GBP), European Euro (1.16 USD = 1 EUR), Kuwaiti Dinar (3.40 USD = 1 KWD), and Switzerland Franc (1.16 USD = 1 CHF).
- Although it underwent depreciation from 2003 to 2008, the US dollar slowly regained its value over time. It goes to show that its impact on both local and foreign investments can take a turn. If the currency’s value is low with regard to different factors (e.g. commodity prices and interest rates), it doesn’t mean that they won’t jump back eventually.
- It can aid in deficit reduction and modify the direction in which the US economy is heading. Once currencies are weakened, exports can be made more competitive and consequently, any incurred debt won’t grow quickly. Moreover, it follows that by cutting government budget regardless of any long-run financial projects, it can reduce domestic demand.
- It is good for helping the US economy recover from a deep recession. When domestic industrial activity has been declining, it doesn’t mean that it has to remain that way. Granted a country’s economic leaders are willing to construct a plan to substitute export demand, improvement in market conditions can be expected.
- The Federal Reserve had a hand in driving the US dollar’s interest rates to an all-time low. While it caused the reduction of borrowing rates and stunted the development of different financial products (e.g. bonds, futures, and options), the participation of a higher authority is a sign that weakening the currency is part of a positive plan for the US economy.