People have been freaking out lately by a weak US dollar. I'm here to tell you it doesn't really matter. Did you know that 60% of Americans have never left the country and less than 25% of Americans own passports? Most of the 40% who leave come back, so it's only a temporary amount of time when their purchasing power may be relatively hurt.
An even better statistic states that only 20% of Americans speak a foreign language. Hence, where the heck are the 80% of Americans going to go if they can't communicate with the locals? Ok, so they may understand what “I want a double quarter pounder with cheese please” in English means, but we aren't going very far if we can't speak another language. Sure a vacation is fine, but it's not like we Americans are suddenly going to relocate overseas and establish roots.
If you are an American who makes a US$ denominated salary, buys US$ denominated assets like property, consumes Levi's jeans, and never plans to leave the country, what are you freaking out about? The US Dollar can depreciate by 90% against the Euro, and it still wouldn't really matter. The government is crushing our currency on purpose and you know the government would never, ever, ever do anything to harm the people they serve.
INFLATION FEARS OVERBLOWN
Economic theory states that for every new dollar printed, inflation will rise by a commensurate amount, eventually. You can read more about the IS/LM model at work here, but it's boring as hell. The issue is that the output gap is running at 7-8%, so there's still a ton of slack and you don't have to worry about inflation.
Yes, it might suck that your BMW becomes prohibitively expensive in the short run, but in the long run, if European and other foreign producers desire to sell to the US, they will find ways to lower their prices accordingly. In the meantime, shouldn't you be buying American in this economy anyways?
You might argue that so much of the input costs of the final good comes from foreign labor and parts. That's true, but all you have to do is move down the cost curve in your consumption patterns. Instead of buying the TV from Best Buy, you go to Costco. Instead of buying the couch from Pottery Barn, buy from WalMart.
GOOD FOR EXPORTS
A weak USD helps US exports, making our goods cheaper to foreigners. If we can't sell goods at home due to a weak economy, what a blessing it is to sell to foreigners! We dump our inventory on them, and make some money in the process! The problem is the US is a relatively closed economy with exports as a % of GDP hovering at 11%, or #157 in the world compared to Singapore, at 173%. In this regard, a weak dollar only helps a small percentage of the economy, but also argues the point that we are a self sufficient country.
The most interesting exchange rate competition lies between the Korean Won and Japanese Yen. Over time, you've seen Korea's export economy resemble that of Japan's export economy. Toyota is matched up against Hyundai, while Sony battles with Samsung Electronics. Korea's export manufacturers are eating a lot of their counterpart's bento boxes recently!
FUNDING OUR DEBT
Many fear that if the USD continues to depreciate, foreigners will stop funding our debt (buying our treasuries). That could be true, but frankly, foreigners like the Chinese are STUCK with over $800bn in US treasuries! If they stop buying our pitifully yielding 3.3% 10-year Treasuries, their US Treasury portfolio is going to tank, and they are going to lose billions more! Would you chop off your arm if you only had to chop off your pinky (accept lower rates)?
China can't help but not continue funding our debt because it is one big “virtuous” cycle. Americans need cheap money to leverage ourselves to buy cheap Chinese goods (we imported $340bn worth of Chinese goods last year), and China likes selling their cheap goods to us. The world knows Americans are addicted to consumption and in a way, foreigners are like junket Casino operators who extend credit to addicted American gamblers. One day we will have to pay back the loan, or face a big man in a dark alley ready to break our knee caps. But, for now, the USD will remain the reserve currency of the world as foreigners can't live without our consumption power.
LET'S TANK THE US DOLLAR TO OBLIVION!
Let's be very clear here. The fear of a weak USD stems from the protectionist mentality of America's business and political leaders whenever a recession hits. A weak currency invites “foreign invaders” who end up purchasing more of our assets, goods & services which for some reason folks don't like.
There's also a pride issue for those who really care about our currency. We're embarrassed when we see that the USD no longer buys 100 Yen to the dollar. But, who cares? Honda Accords are made in the US anyway! A weak US dollar is a symptom, not a problem. Get over it and start chanting, “USA, USA, USA!”
Summary: Most Americans only speak English, seldom ever travel to a foreign country, and can't afford fancy BMWs and other foreign cars because they don't make at least 10X the cost of the car. As a result, a weak dollar is actually good for USA. Let's go export industry! In 2023, the U.S. dollar is super strong now! So don't worry. Americans can buy everything thanks to our strong currency and high interest rates.
U.S. Dollar Update 2023+ – Why Is The U.S. Dollar So Strong?
There are a few key reasons why the U.S. dollar is strong compared to other currencies right now:
- Interest rate hikes by the Federal Reserve – The Fed has been aggressively raising interest rates to fight inflation. Higher U.S. rates boost the dollar by making dollar-denominated assets more attractive to investors seeking higher yields.
- Safe haven appeal – During times of global uncertainty like we're seeing now, investors tend to flock to stable assets like the U.S. dollar which is seen as a relative safe haven. Things like Russia's invasion of Ukraine have increased demand for dollars.
- Economic growth and outlook – The U.S. economy remains on stronger footing compared to other major economies like Europe and China that are seeing slower growth. This provides underlying support for the dollar.
- Weakness in other currencies – Currencies like the euro and yen have weakened significantly against the dollar for their own economic and policy reasons, further lifting the dollar in relative terms.
- Positioning and trading flows – Increased speculative long dollar positions and currency flows have created a self-reinforcing effect lifting the greenback further.
So in summary, it's a combination of higher U.S. yields, safe haven appeal, economic resilience and weakness elsewhere that is driving the dollar's strength right now against major peers. Some see it as a cyclical peak, however, and expect a reversal long-term.
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About the Author:
Sam began investing his own money ever since he opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $350,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
You are right, American do not worry about weak dollar, if we compare dollar with other countries such as India where US is hoping bulk deals and Indian rupee is facing all time low against US dollar. If we see the exchange rate of dollar to rupee amid falling global market due to crude oil and COVID-19; the 1 USD to INR stood 1$=76.61. I dons’t think there is no need to worry.
If the dollar is weak the cost of imports increases. USA imports many things from the Far East, all of which will increase in price, creating inflation in the short to medium term. As the US no longer has the skills to make many things and couldn’t hope to catch up due to the immense amount of technological advances would be US manufacturing workers would have to assimilate, it is very unlikely to ever get that manufacturing expertise back, even at much higher prices re imports due to a weak dollar. What will happen is the hollowing out and impoverishment of USA as people can afford less and so buy less.
Re China, the only reason it buys US treasuries is as a dollar supply to to convert back into renmimbi in order to aid Chinese exporters. This works whilst ever the USA is a big consumer of Chinese products. However, the far East has been growing at an immense rate and does a lot of trade within itself. It is fast approaching the situation whereby it won’t need the USA anymore. Given the aggressive attitude of the USA towards China and the indifferent attitude of the EU towards China it will likely favour the EU over time and dump it’s US Treasuries when it deems it can afford to do this. When it happens the US dollar will collapse, import prices will go shy high and as the US lacks the skills to provide substitute goods for those lost in imports the USA will become a third world country.
This is likely to happen over the next 30 years – there is nothing good to come from a weak dollar over the long term.
Personally, I don’t care about the weak USD for travel reasons and as an equities investor, of course it’s been adding a few percentage points to earnings each quarter for the multinationals I own. However, to think this trend can continue forever with no consequences is missing a major point – we do import many commodities – oil especially. See how much people were freaking out over $4 gasoline? What do you think $6 oil will do to the economy? High gas prices are a tax, no way around it. You’re not for raising taxes as a way to boost the economy, right? We’re also seeing food prices increase, clothing, and our much-needed electronics. Eventually, we do and will see inflation and slower growth.
Oil will only go to $6/gallon if the economy is strong enough to bare. I see high oil as a signal that the economy is strong, and not a signal for bad things to come.
So is the joke now, “If you you owe China a million dollars and can’t pay you have a problem, but if you owe China 800 Billion dollars and can’t pay then China has a problem?”
All joking aside, as a Canadian that lives near the US-Can border I can say with certainty that the towns close to the border are LOVING this dollar rate. Also, as a Canadian consumer I am loving it as well. Not only to get access to a much broader market of goods, but Canadian business now need to compete directly with their American counterparts and lower prices. It also makes American blue chip stocks ultra-attractive right now, because we are essentially getting them at a discount (relative to ‘average’) due to our dollar being at par with the USD.
We need you to cross the border and not only buy our stocks, but buy our real estate!
Actually a lot of people I know have been doing just this. Florida and Arizona have been popular options for many older people looking to become snowbirds. Personally, I have been exploring the Vegas real estate market. I think in terms of an investment it has to much of a pain-in-the-ass factor for me, but if your looking to build a home to live in for a large part of the year I think this will be a once-in-a-lifetime opportunity for Canadians.
Come to San Francisco and buy. It’s the most beautiful city in America! :)
I believe they are printing money in order to bail out banks and corporations. Inflation is also hurting food and gas prices. Food prices around the world are rising and contributing to the instability in the Middle East. We import more than we export. That won’t change until wages in developing countries are similar to those in the US. Fat chance on that happening any time soon. If you think the Gov’t will actually reduce debt then you are dreaming. The Healthcare bill will be a massive burn on the debt. Medicare, social security, and defense will not be cut. Gov’t programs will only grow and the debt will only rise. Nice idea, but I don’t buy it.
The sad part is, most of the people who read this aren’t the ones who need to be convinced of the point you are trying to and do make. The only way to increase demand for our products and services is by increasing demand from abroad for them and a lower value on the dollar is the best way to do this. I am all for it.
I’m all for a weak or strong dollar. To be honest, as a currency trader, I don’t really care where it moves, just as long as it moves! I would have to say though that as a person who likes to travel, I may just have to start visiting countries where my dollar buys more. Who wants to go to Europe anyway?
Didn’t realize you are a currency trader. Tell me more! Is it for a firm or for yourself?
.73 cents of every dollar our government gets is committed to debt. that should scare us if nothing else does. our government is broke. Have been for years. They just refuse to admit it.
Cool! I just came to your blog via Google and I seriously loved it! The effort you do in posting here is seriously fantastic and I am pleased about it. Keep going buddy.
“We may have a gradual rise to 5-6%, but the days of double digit inflation are long gone due to the efficiency of cycles.”
Gee, Sam, that is just what younger and less experienced loan officers said about five years ago when I warned that the economy would not keep going up, up, up! (I train lenders on credit analysis for business loans.) They said it was a new economic paradigm based on information, not manufacturing or agriculture.
The experienced lenders in the room (and I) just shook our heads. Turns out we were right.
On what do you base your assertion that inflation will only rise to 5-6%? And how does our efficiency of cycles deal with the deflationary challenge we just experienced (or perhaps are still experiencing)?
As to the damage this does, a loaf of bread is $2 and a person who retired 15-20 years ago (my parents) with a fixed income has to eat. It was $.25 or so then. Gas at $4 is a much different proposition than gas at $1. You come across as a bit heartless when you imply that everyone can spend more because everyone is making more. Or blithely say thank goodness ‘grandma’ lives in the country because it costs less than the big city.
Inflation hurts. And it steals from everyone. Savings and fixed retirement income loses purchasing power. That purchasing power belonged to someone…and now it doesn’t.
Linda – Glad you were able to tell all your clients to sell all their assets and put everything in cash! Well done and no need to have any more clients any more b/c I assume you are very well off.
If as you say we have a “deflationary challenge”, why do you think there will be inflation? That’s a contradiction.
I continue to believe inflation will be as tame as a sleeping panda bear. The 10-yr yield won’t breach 5% in 2010, and you can take that to the bank. Feel free to take the other side and put a wager on it!
Best, Sam
Hi Sam (hope that’s right),
I’m an US Citizen who moved overseas to work in 2006, I still reference things to US dollars so when the USD goes down things do feel more expensive for me! I should add that currently I’m paid in a local country salary based on a fixed exchange rate to the US Dollar so when the dollar goes down my salary does go up slightly.
The US is a net importer so when the value of the USD comes down then imports go up- many manufactured items are imported into the US so that will be effected.
The big impact would be if the dollar dropped dramatically, as many items are priced in USD. I work making computer hardware and all our product prices are priced in USD so if the dollar gets very weak it’s a problem for us as we pay salaries (for my workers) in local currency.
I would prefer a strong and stable dollar.
But I’m not a typical American- I can speak some Thai, Spanish and can understand one of the regional Indian languages.
As for countries getting into massive debt (like the USA now) look to your mother country of Japan- they have been stuffing themselves with debt for 20 years since the peak of 1989 and the market is still significantly lower than the peak. There has been pervasive deflation and multiple recessions in Japan and even today they are announcing a war on deflation . So there may well not be high inflation in the US. In fact the period of high inflation in the US was from 2001 – 2007 as home prices and commodities and food spiked up. Be careful loading up on debt right now!
-Mike
Hi Mike, thnx for your thoughts. You are not the typical American indeed, living abroad and speaking other languages.
Funny you say that the period of high inflation was from 2001-2007. That was the period when the Fed Funds went to pretty much 0%, and the 10-yr treasury yield bottomed at around 3%. If there was inflation, rates would be high.
So that’s the thing, if I do believe there will be inflation with all this monetary expansion, I’d load up on debt. Alas, I think inflation will cont to be benign, as it has been for the past 30 years.
Sam
Not a bad perspective. Although, I think there are plenty of places the average English speaking American schlub could go without having to learn a foreign language. England, Australia, Canada (America’s hat); all have their own currencies and varying degrees of interconnectedness with the dollar (Australia’s actually already starting to come out of this downturn, much ahead of much of the Western world). All of that said, I don’t disagree with your main point, that it’s unlikely too many people are going to flee from the United States, and that for those of us who stay in the states, the effects of a weakening dollar are likely to not be that bad.
Hi Roger – That’s true about all the other English speaking countries in the world. Australia is rebounding as evidenced by their latest rate hike. I just think America is just too much of a closed economy that it doesn’t really matter.
I hear there will be a heavy rebuttal on this post from another popular website. I can’t wait! :) FS
@Financial Samurai
“We’re all right some of the time, until we aren’t!”
Great quote! That goes into my list with:
“Everything follows a trend, until it regresses to the mean.”
“I don’t want a return ON my capital, I just want a return OF my capital”
“If you had to live your life again, you’d need more money”
“You have the same chance of winning the lottery, whether you play it or not”
“Sometimes your best investments, are the ones you don’t make”
“Where large sums of money are concerned, it is advisable to trust nobody.”
BG – Not sure if that’s a compliment or a backhanded comment haha. Still not sure why people really think a weak dollar matters. You ever travel overseas? Do you speak another language? Do you spend a lot on foreign goods? Just wondeing. FS
@David@DINKS Finance You must be still in college. Having such great faith in certain people only occurs when you are young. Call me a skeptic.
The Genius
David, sorry that came out wrong. It’s great you enjoy his views. I just encourage all of us to always question the assumptions and think for ourselves. We’re all right some of the time, until we aren’t! FS
@David@DinksFinance Sorry, that wasn’t nice of me and it came out wrong. I encourage you to just take everybody’s opinion’s and status with a grain of salt. Everbody is right, until they are wrong. Best, FS
While I am impressed that you know Peter Schiff personally, I don’t really appreciate the “blind follower” label. I suppose you would call me a “blind follower” of Ron Paul, Austrian Economics, Tom Woods, Adam Kokesh, and a whole bunch of others but hey, it’s your opinion, right?
Wait!!! Tell me more about this!!! Do you maintain contact with Peter?? Can you introduce me?? haha
David – Haha, he’s a tough man to get a hold of these days b/c of so many blind followers like yourself! Can you get Michael at DINKS to work for me and set everything up? I could use his expertise. FS
@David@DINKS Finance
It’s a small world David! If there’s anybody you should admire, it should be Warren Buffett! I actually think Economics is more important than finance, but I’m biased.
After getting your masters, getting your PhD doesn’t mean too much in the world of finance. Good for marketing to raise money and maybe build models, but it’s not necessary. FS
@David@DINKS Finance
I feel better knowing that I didn’t see a 40% loss (no financial education for me). I calculated that we were out at 7-8 standard deviations and decided to go 100% stable value a few days before the huge drop in Sept/Oct 08, to end 2008 with “only” a 22% drop in the 401k. Pure luck. I plan to check out one of Schiff’s books based on your recommendation, thanks.
@Financial Samurai: As for the dollar being close to the bottom, I agree, it is very low right now. When the dollar starts to recover, I expect the current bubbles to start popping (stocks, bonds, commodities, gold, etc). Everything is so highly correlated to the dollar right now, it is not even funny. Everyone is a USD currency trader, whether they know it or not. I tried to rebalance/optimize my portfolio last week, using uncorrelated funds (the proper way with post-modern portfolio theory), and there aren’t any funds that are _not_ highly correlated with each other — meaning they are all highly (inversely) correlated with the USD.
There is either “Stable Value”, or “Everything Else”.
I decided to start moving out of stocks and to start loading up on Bonds and Stable Value, cause when the bubble pops (and hopefully correlation ends), I’m betting stocks will fall the hardest. It ticks me off that my investment strategy is almost purely based on what I think the Fed is going to do to our currency.
Haha that’s an interesting thought but no I am not Michael. I don’t post at all on DINKS I do other things for them, but I see you found my political blog!
Wait, do you really know Schiff personally? Not a joke? Really??? You have no idea how much I look up to him. I became very VERY cynical about my finance degree when my profesor who had an MBA in finance, PHD in finance, and two award-winning articles told us he lost 40% of his 401K with everyone else. I had always thought if I knew some more of the fundamentals of finance (hence why I majored in finance, plus I think finance is the bedrock of a company because let’s face it you have to make a profit or you don’t exist!) I would be able to make more money personally. Not true! But after reading Schiff’s books I became inspired and now I’m all about his investment philosophy.
But seriously you know him????? I want to know more about this!
-David
Financial Samurai,
Ah I miss reading your posts. I thought I would stop by and leave a little comment. I have been busy on various projects over at DINKS Finance, but I will try to stop by a little more.
Alright, I don’t have time to refute your post (which I totally disagree as you probably expected) but I want to ask you two questions:
1) Have you ever read either of Peter Schiff’s books?
2) Would you be willing to read at least one, if not both of Peter Schiff’s books and then post about where his theory is wrong (since you can’t both be right!).
-David
Hi David – I was wondering where you’ve been. Are you sure your other name is not “Michael” who is busy posting a lot of articles on DINKS? If so, it’s cool! I don’t mind anybody posting anything, so long as there are complete sentences! :)
Peter used to e-mail me asking for advice. I mentioned to him he’s got to really go out with a strong stance if anybody is going to read his book. I’m glad he has. There’s been a 25 yr bull market in the bond market, and yes, the bond market is in a little itsy bitsy bubble. But, we’ll be in a bubble for a LOOOONG time b/c everybody is stuck with our currency.
Solution is simple: shrink government and spend less money. Sooooo easy a solution.
I’m actually pretty BULLISH on the US dollar here. We’re closer to the bottom than the top. Have faith! Everything balances out.
Best, FS
I am american expat who moved abroad when the dollar was strong. I am among that group of Americans who speak a foriegn language and don’t come home. I won’t consider returning until something reasonable happens with health care. Now I earn more valuable money since the us dollar is weak. It may not matter to you but it does to me. I shop differently based on the dollar exchange rate and travel differently based on the dollar exchange rate. It good news for me and amazon.
@Financial Samurai
I don’t know what sources you are looking at, but when the dollar hit it’s lowest point (USD Index) @ 71-72 from April to July 2008, gasoline prices were also hitting their all-time highs. when gasoline hit its lows in January/February 2009, the USD Index was back up to 89.
The USD Index and fuel costs (in the US) are nearly perfectly inversely correlated (-1). Weak dollar == higher prices, Strong Dollar == lower prices.
How you can keep saying that the value of our currency (relative to others) has no affect on our prices is beyond me. I don’t know if one causes the other (or some third thing is causing both), but I’m pretty confident that a weaker dollar is going to lead to higher fuel costs (hell, it already has since March).
@Financial Samurai
Keep in mind oil does affect the cost or other raw goods and farming. So while it’s done in the USA their cost is still affected.