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Whether we’re in a booming economy or facing a recession, finance experts always relate what is happening to the strength of the dollar. A weak dollar impacts our buying position, as we are forced to pay more for the same imported product. This is particularly important for U.S. businesses who need to source components in Euros or other currencies. This can be a complex issue to understand, so here we’ll delve into the topic a little further and explain how a strong versus weak dollar affects U.S. businesses.
The reasons for a weak dollar
A weak dollar refers to a lower U.S. dollar value compared to other currencies. For example, if the exchange rate is $1 to €0.80, and then it changes to $1 to €0.90, the dollar has weakened against the Euro. There are a number of reasons why this may occur.
The first reason why the dollar may weaken is monetary policy. The Federal Reserve (the Fed) implements policies to adjust interest rates. When the Fed implements quantitative easing measures or lowers the interest rate to encourage people to borrow money and stimulate the economy, this can weaken the dollar. Since 2008, both conditions are met — interest rates are very low (at an all-time-low most of the time), while the Fed injected trillions of dollars into the financial markets. Due to the pandemic and its impact on the U.S. economy, the FED printed money more than ever before.
And this brings us to the next reason for a weakened dollar: inflation. Generally, higher inflation depreciates currency, as the cost of goods and services are higher. Likewise, the dollar can be weaker when the prices of exports fall. For example, oil is a major export for Canada, so when oil prices drop, the Canadian dollar weakens.
Implications of the weak dollar for businesses
A weak dollar has less buying power against other currencies, and this can have numerous implications for both consumers and businesses, but not all are negative.
- Imports and exports: A weak dollar means that imports are more expensive, but conversely, exports are more attractive to buyers outside the U.S. So, for businesses that import components or products in another currency, their costs will increase. However, if your business exports goods overseas, you may find that there is an increased demand.
- Increased expenses: Even if your business does not import or export, you may still experience increased expenses. There are items that tend to have a greater susceptibility to a weak dollar, such as gasoline, travel, and commodities. So, if you need to purchase plastics or need fuel for your machinery and vehicles, a weak dollar could impact your bottom line.
- Stock investments: If a company is sensitive to movements in dollar value, it can also impact stock value.
- Increased lending potential: When the dollar is strong, it can exert a drag on the U.S. economy. This achieves similar results to a tighter monetary policy, such as increasing interest rates. Conversely, when the dollar is weaker, interest rates tend to be lower. This increases the lending potential for consumers and businesses.
- More flexible credit terms: This is a continuation of the above point, but lenders may also offer more flexible credit terms to entice borrowers when the dollar is weak. So, you may not only qualify for a more attractive rate, but also offer fewer restrictions and more favorable terms if you sign up for a new finance agreement.
- Changes to consumer spending: Since a weak dollar increases the cost of imported goods, it can lead to reduced consumer spending. Retailers may increase the price of other products to compensate for decreased sales and to generate more revenue. Consumers may take steps to tighten their belts and be reluctant to purchase non-essential or luxury items.
- Pressure to increase wages: Employers may also find there is pressure from employees to increase wages. Employees are likely to want this to offset the increases in the prices of consumer goods. If you are unable to give your employees a raise, you may find that team cohesion and satisfaction diminishes.
Related: The High Cost of a Low Dollar
Which type of businesses will benefit? Which will be hurt?
Since there are both positive and negative…