The terms weak dollar and strong dollar are used in the foreign exchange market to explain the relative value of United States currency when compared to other currencies on the market. One must look at the value of two or more particular currencies over a fixed period of time in order to accurately evaluate money in this way. If the dollar has a historically high exchange rate relative to its normal value when compared with another currency, it is considered to be strong. If the dollar has a low exchange rate relative to normal when compared with the value of another currency, the dollar is considered weak. When a currency is strong, it essentially means that investors trust that currency. They expect it to remain relatively stable and to retain its value. Strong currency is usually a sign of a healthy economy, but that is not always the case.
The Current Strength of the U.S. Dollar
The United States currently has what is referred to as a strong dollar. At the close of 2014, it was trading at its highest since 2009. Because it is strong against several major world currencies at a time when the country is still recovering from an unstable economy, the sudden rise in value took many people by surprise. Gas prices dropped significantly all across America during the first few weeks of 2015. This was the result of increased purchasing power. The dollar’s higher value meant being able to buy certain commodities for much cheaper than it could when the dollar was weak.
What contributed to the Rise of the U.S. Dollar?
Several factors explain the rise of the dollar’s strength. Unemployment is decreasing, retail sales are increasing, and more economic growth is expected. The return to normal interest rates by the Federal Reserve is also being pointed to as another major reason that explains why the U.S. dollar is regaining strength. As the American jobs market continues recovering, interest rates are expected to continue rising throughout 2015. Because the measure of dollar value is relative, another reason for the increased value is that other countries’ currencies have weakened. If the American economy continues improving, the dollar’s value is likely to keep gaining strength.
What Are the Upsides and Downsides of a Strong Dollar?
One benefit of having a strong dollar is that the price of certain highly desirable commodities drop. Oil prices in the United States tend to drop, sometimes quite significantly, when the dollar gains strength. This translates to lower prices at the gas pump. For people involved in Forex trading on the foreign exchange market, the upside of a strong dollar is being able to buy foreign currencies at a much more favorable rate than normal. However, there are plenty of downsides. One is that federal interest rates are likely to rise even more. Another downside is that companies that do a great deal of business in foreign markets are likely to be negatively affected. Their sales are likely to drop. Even if those companies’ sales continue at normal rates, their profits will still be lower. Weaker currencies can help a country regain balance after periods economic instability. Since the U.S. is still in the midst of a rebounding economy, not everyone is expecting the return of strong currency to be without its problems.