How Do Exchange Rates Affect Me?

6 Surprising Ways Exchange Rates Affect You

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If you'd like to buy from these Uros Peruvian women, you better understand exchange rates. Credit: Ed Norton/Getty Images

You don't think about how exchange rates affect you until you travel. But they impact the value of the dollar. That affects everything you buy, from groceries to gas. Here are more surprising ways exchange rates affect you.

Groceries

A strong dollar makes imports cheaper. That reduces inflation and lowers the cost of living. It allows you to buy more. More important, you could save more without harming your quality of life.

Then you could save for a rainy day, or for retirement. 

A weak dollar makes import prices higher. That lowers your standard of living because you'll pay more for imported fruits vegetables, and other groceries. It also causes inflation. That erodes your purchasing power over time.

Gas

When the dollar rises in value against other currencies, gas prices fall. Why? More than 70 percent of the price of gas depends on oil prices. All oil contracts are sold in U.S. dollars. Saudi Arabia, who sells most of the world's oil, has pegged its currency to the dollar. When the dollar rises against the euro and other currencies, so does the riyal. That makes Saudi Arabia's imports cheaper. Therefore, Saudi Arabia can afford to charge lower prices for oil when the dollar rises. It still receives the same value from its imports. 

When the dollar weakens, gas prices rise. That's because Saudi Arabia and the other OPEC nations must charge more for oil to receive the same revenue.

Also, their import costs are higher, so they need more revenue to pay for expenses.

Jobs

A strong dollar is not good for U.S. business. That's because it means they can export less. Why? A strong dollar makes their products more expensive relative to foreign products. Over time, this slows economic growth.

It also causes companies to outsource jobs overseas. That's because foreign workers cost less since they are paid in weaker currencies.

A strong dollar even hurts companies that don't export. That's because they are now competing with cheaper imports. U.S. customers will buy those less expensive imports instead of those Made in America. The U.S. manufacturer must lower prices to remain competitive. That means less profitability. 

For those reasons, a strong dollar slows economic growth. It also results in fewer jobs for American workers.

Loans

A strong dollar means that demand for U.S. Treasurys is also strong. That's because most countries buy Treasurys when they need to store U.S. currencies. They do that so their exporters can do business with America. When demand for Treasurys is high, that makes interest rates low. A strong dollar means loans are less expensive. That includes mortgages, auto loans, and school loans. It also keeps a lid on credit card debt rates, and adjustable-rate loans. For more, see Relation Between Treasury Notes and Mortgages.

A weak dollar means interest rates higher. That's for two reasons. First, a weak dollar means there isn't enough demand for Treasurys.

The U.S. government increases interest rates to attract more investors. Second, the Federal Reserve will raise the fed funds rate. Remember, a weak dollar means inflation. The Fed's goal is to keep inflation from going higher than 2 percent. The Fed will raise rates to strengthen the dollar, and curb inflation.

Investments

A strong dollar can either help or hurt stocks. It depends on the reason. Investors buy dollars when they think the U.S. economy is strong. That means they are also more likely to invest in U.S. companies through the stock market. On the other hand, a strong dollar makes U.S. stocks more expensive. That might make U.S. stocks too expensive for foreign investors.

A weakening dollar helps you if you already own foreign stocks. Those values will seem higher thanks to exchange rates.

A weak dollar helps U.S. exports. This strengthens economic growth. It also makes U.S. stocks cheaper when compared to shares listed on foreign exchanges. 

Travel Overseas

The exchange rate tells you how much you can buy in your destination country. When the U.S. dollar is strong, you'll be able to buy more. If it's weak, then you might want to postpone the trip because everything will be more expensive.

There's a way to avoid the exchange rate impact on your trip. You could go to one of the 66 countries that pegs its currency to the dollar. That means a trip to that country will always cost the same, no matter what the dollar does. In the current economy, the dollar is relatively strong so it's a good time to go.