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What happens when the dollar grows stronger or weaker?
Presented by Nolan Baker
Recently, Federal Reserve Chairman Ben Bernanke has hinted that the U.S. is going to try to strengthen
or at least stabilize the weak dollar. So what might happen to the economy with a stronger dollar?
And how has the economy been affected by a weak one?
Effects of a weak dollar. The dollar has fallen more than 40% versus the euro and 26% versus the yen
in the last six years.1 Its value has dropped 28% since 2001 compared to other benchmark currencies.2
This devaluation has meant boom times for U.S. corporations and companies that do business overseas,
reflected in their earnings reports (and in their stocks on Wall Street). A weak dollar also helps to
shrink the U.S. trade deficit, which has slimmed notably in the last couple of years.
On the other hand, a weak dollar breeds inflation and drives up the prices of imported goods. It also
helps drive investors to the commodities markets, as they turn to oil, gold and other hard assets
for a hedge against inflation. Witness the amazing ascent of oil and gold prices.
Effects of a strong dollar. If the Fed raises interest rates (and some economists feel there may be
a rate increase before 2008 ends), that could strengthen the dollar, tame inflationary pressures,
and help to weaken oil prices. But it also risks crimping the economy further, given that the housing
market has yet to pull out of its slump and that consumer spending is already pinched due to high
energy and food prices. The U.S. could also strengthen the greenback by buying dollars in the
foreign exchange markets, something that hasn’t happened since 1995.
That was the year U.S. Treasury adopted a strong dollar policy. Between 1995 and 2001, the dollar
gained 29% in value against a basket of other major currencies.2 However, because of that increase
in valuation, demand for U.S. exports lessened, and that was a contributing factor to the 2001
recession.
Where are you putting your dollars? How is this economy affecting you, and where are you investing
your money? A chat with a qualified financial advisor might be eye-opening - an advisor who is
independent, and ready to work for your goals. Now is a good time to look ahead and plan for your
objectives, with a financial strategy that will help you whether the dollar recovers or falters.
Think about that today.
Nolan Baker is a Representative with NEXT Financial Group Inc. and may be reached at 419-842-0550
or nolan.baker@nextrep.com Securities offered through NEXT Financial Group, Inc. Member FINRA/SIPC
Citations.
1 fool.com/investing/general/2008/06/05/bernanke-changes-strategy.aspx [6/5/08]
2 marketwatch.com/news/story/makes-economic-slump-different/story.aspx?guid=%7b8F4AB40B-962A-419C-A478-CAB86547EDFB%7d&print=true&dist=printMidSection [5/19/08]
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