The Value of the Dollar - Why it Matters?
If you have been watching the news lately you have seen the latest topic that has been bearing down on the stock market is the impending debt crisis in Europe. As part of that conversation you have probably read or heard that the US dollar has risen in value as compared to the Euro or British Pound. However, you may be wondering, what does that really mean for me?
The truth is that currency valuations mean different things for different people and it can be both good and bad.
What does it mean for the US traveler?
A strong US dollar, or “greenback” as they are sometimes called, is good for the world traveler. When you leave the USA and travel to someplace like Europe you will be conducting transactions in another currency, probably the Euro. A strong dollar means it takes less US dollars to buy Euros so when you get your statement and the charges you made in Europe have been converted to US dollars, and the dollar amount is less. For example, lets say the that one year ago that 1 Euro = 1.5 US dollars but currently 1 Euro = 1.25 US dollars. If you bought an item for 10 Euros one year ago it would have cost you $15 but now it costs $12.50 - significantly less.
What does it mean for the US manufacturer who exports goods?
A strong dollar actually hurts the US manufacturer who depends on exporting goods outside the USA. This is because as the US dollar becomes stronger or rises in value, the cost of the goods he produces becomes more expensive to his customers. For example, in the same scenario as above where 1 Euro = $1.5 USD last year but this year 1 Euro - $1.25 USD, if a customer in Europe bought $15,000 USD worth of some product, it now costs 12,500 Euro ($15000 / 1.25) as opposed to 10,000 Euro last year.
China has been under a lot of scrutiny in recent years because other countries believe the Chinese government has been purposely devaluing the Chinese currency. This allows exports to be cheap on the world market.
What does it mean for the US government?
Apart from hurting exports, the US government is actually favorably affected by a strong US dollar. Many other nations hold US government debt as investment instruments because those countries are confident the US will not default on this debt. Part of this massive deficit the USA runs is financed by selling US Treasury notes to foreign investors. As the dollar is stronger, more countries invest in these as a safe haven for their money.
If you have been watching the news lately you have seen the latest topic that has been bearing down on the stock market is the impending debt crisis in Europe. As part of that conversation you have probably read or heard that the US dollar has risen in value as compared to the Euro or British Pound. However, you may be wondering, what does that really mean for me?
The truth is that currency valuations mean different things for different people and it can be both good and bad.
What does it mean for the US traveler?
A strong US dollar, or “greenback” as they are sometimes called, is good for the world traveler. When you leave the USA and travel to someplace like Europe you will be conducting transactions in another currency, probably the Euro. A strong dollar means it takes less US dollars to buy Euros so when you get your statement and the charges you made in Europe have been converted to US dollars, and the dollar amount is less. For example, lets say the that one year ago that 1 Euro = 1.5 US dollars but currently 1 Euro = 1.25 US dollars. If you bought an item for 10 Euros one year ago it would have cost you $15 but now it costs $12.50 - significantly less.
What does it mean for the US manufacturer who exports goods?
A strong dollar actually hurts the US manufacturer who depends on exporting goods outside the USA. This is because as the US dollar becomes stronger or rises in value, the cost of the goods he produces becomes more expensive to his customers. For example, in the same scenario as above where 1 Euro = $1.5 USD last year but this year 1 Euro - $1.25 USD, if a customer in Europe bought $15,000 USD worth of some product, it now costs 12,500 Euro ($15000 / 1.25) as opposed to 10,000 Euro last year.
China has been under a lot of scrutiny in recent years because other countries believe the Chinese government has been purposely devaluing the Chinese currency. This allows exports to be cheap on the world market.
What does it mean for the US government?
Apart from hurting exports, the US government is actually favorably affected by a strong US dollar. Many other nations hold US government debt as investment instruments because those countries are confident the US will not default on this debt. Part of this massive deficit the USA runs is financed by selling US Treasury notes to foreign investors. As the dollar is stronger, more countries invest in these as a safe haven for their money.