What a stronger dollar means for the economy

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CBS News – Mark Thoma 

Published: October 13th. 2014

Difficulty rating

Rating: 3 out of 5.

Credibility rating

Rating: 4 out of 5.

Preview

This article discusses the benefits and disadvantages of a stronger currency for the people and the economy. It explains how a central bank can control and affect a country’s currency. The article also describes how strengthening currency influences behaviours of exporters and importers and explains the role interest rates have to play in a stronger currency.

Author

Mark Thoma is a macroeconomist and econometrician and a Professor of Economics at the Department of Economics of the University of Oregon. His research focuses on how monetary policy affects the economy, and he has worked on political business cycle models. He is also an analyst at CBS MoneyWatch.

Sources

  • No sources used

Analysis of Potential Bias

The author was giving his opinion on how a stronger dollar affects the economy, but there were no sources to back his claims. However, as he is an expert in the field, I believe the article to be credible.

Article Decryption

The value of a currency against another is largely the result of the central bank policy of a country. The currency will fall in value if a central bank uses loose policy (which includes low-interest rates) and will increase in value if the central bank uses tight policy-raises interest rates. A reason for the U.S. dollars’ strength is that the Federal Reserve is expected to raise interest rates.

The effect of that on U.S. exporters is that U.S. goods become more expensive to foreigners, which hurts those working in exporting industries. Why? Look at it like this: on July 1, one euro could be traded for US$1.37, but on Oct 13, one euro only got US$1.27. If a good produced by a U.S. exporter cost $1.37 on July 1, you could buy it with one euro, but on Oct 13, you would need more than one euro.

This situation is good news for importers, though. Goods imported into the U.S. become cheaper for Americans. Exports add to the demand for U.S. goods and services, but imports reduce the demand for U.S. goods and services. The difference between the two is called net exports. Exports fall, and imports rise when the dollar strengthens, so the demand for U.S. goods and services falls, which is bad for a recovering economy. Specialization refers to the tendency of countries to specialize in certain products which they trade for other goods, rather than producing all consumption goods on their own. So, specialization not exchange rate is the basis of global trade, as few countries have enough production capacity to be completely self-sustaining.

The exchange rate measures the value of a currency. Exchange rates are relative and are expressed as a comparison of the currencies of two countries. Many factors, apart from central bank policies, affect the exchange rate. Countries with lower inflation rates tend to see an appreciation in the value of their currency. Higher interest rates attract foreign capital and cause the exchange rate to rise. Lower interest rates tend to decrease exchange rates. The amount of government debt can influence the exchange rate. If markets fear a government may default on its debt, then investors will sell their bonds, causing a fall in the value of the exchange rate.

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