How Do Exchange Rates Affect Me?
6 Surprising Ways Exchange Rates Affect You
Exchange rates affect you whether you travel or not. They impact the value of the dollar every day of the week. That affects everything you buy from groceries to gas. Here are six of the ways exchange rates affect you.
A strong dollar makes imports cheaper. That reduces inflation and lowers the cost of living. It allows you to buy more. More importantly, 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.
When the dollar rises in value against other currencies, gas prices fall. Why? More than 70% 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. So, 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. 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.
A strong dollar is not good for U.S. business. 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. Foreign workers cost less since they are paid in weaker currencies.
A strong dollar even hurts companies that don't export. 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.
A strong dollar means that demand for U.S. Treasurys is also strong. 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.
There is a direct relation between Treasury notes and mortgages, especially the fixed-rate ones. When Treasury yields rise, so do interest rates on home loans. When bond and note yields fall, mortgage interest rates decline along with them, making home loans more affordable. This encourages people to spend on building, buying, or renovating houses, which drives demand for the real estate industry. In turn, this demand spurs GDP growth.
A weak dollar, on the other hand, means higher interest rates. 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%. The Fed will raise rates to strengthen the dollar and curb inflation.
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. 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 weak 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.
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 countries that pegs its currency to the dollar. A trip to that country won't become more expensive when the dollar declines. In the current economy, the dollar is relatively strong so it's a good time to go.
The Bottom Line
Whether the strength of the dollar has a positive or negative impact on U.S. society depends where you are in it. A strong dollar drives the engine for economic growth. It encourages consumerism, production, and investments. But it may also diminish employment opportunities. It motivates companies to outsource jobs from countries with weaker currencies. It also hurts U.S. exports because it makes “Made in the U.S.A.” goods pricier than its counterparts sold by other countries.
A weak dollar does the opposite by decreasing consumer demand for imported goods, of which much of the U.S. market is dependent on. A low dollar exchange rate will be an advantage to U.S. exporters. But it also make imported supplies more expensive. This could slow production. It could also raise interest rates, reducing demand for loans from most other sectors of the economy.