A Strong USD

dol2Well as you’ve probably seen the U.S. dollars has been strengthening in relation to many other currencies. On the surface this certainly sounds positive, and to be honest there are quite a few positives. But there are also some areas that aren’t positively affecting by a strong dollar. Now in order to understand this, we need to understand how exchange rates work.An exchange rate is simply the value of one nation’s currency in comparison to that of another. Generally speaking, currencies fluctuate based upon the demand for a nation’s currency as well as goods produced in that currency, but they also fluctuate based upon supply.Meaning that if a country engages in some type of accommodative monetary policy there is likely to be an impact upon the value of their currency. For the most part, nations utilize what’s called a floating exchange rate. This means that the value of their currency fluctuates depending upon market conditions.Lets talk about the impact of a strong U.S. dollar, much like we’re experiencing currently. Because of an improving U.S. economy and economic troubles in Europe, the U.S. dollars has strengthened. This strengthen of the dollar has number of different implications.First lets look at some of the positives. As an American citizen traveling to Europe, you would likely be pleased with a strong dollar. To illustrate this, walk through a brief scenario. Lets say you wanted to travel to Europe about a year ago and you obviouslywanted to convert some dollars into Euros. So businesses in Europe that cater to tourists such as hotels,restaurants, and other services may actually benefit from a stronger dollar and subsequently a weaker Euro.O

Outside of tourism, is USD a strong currency still? Lets look at imports and exports. Just to refresh, an import constitutes goods that are produced in another country and brought into the country for consumption. So automobiles manufactured in Japan and shipped to the U.S. for sale would be considered imports from the perspective of the U.S. An export is the exact opposite. In this case a good dolto produced domestically and shipped internationally for consumption. You’ve probably noticed that fuel prices in the U.S. have declinedsignificantly over the past six months. This is in part due to the U.S. exporting more oil, which results in a greater supply of oil on the market. The important thing to remember is that there are winners and losers when a dollar strengthens in value. Although U.S. importers enjoy a stronger dollar as it meansthey can purchase more foreign made goods with the same amount of money, U.S. exporters tend to prefer a weaker dollar as it makes their goods appear more attractive to other countries.

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