Reasons for a Weak Dollar and Some Potential Benefits

By Stock Research Pro • May 4th, 2009

A weak dollar refers to times when the value of the U.S. dollar is declining compared to one or more foreign currencies. When the dollar declines in value, you are able to exchange it for less of a foreign currency, decreasing your purchasing power in that country. While a number of factors can influence the value of the dollar, including economic, social and political issues, a weak dollar is not always bad for the overall U.S. economy.

Some Causes of a Weak Dollar

The market for currencies is similar to any other with supply and demand forces at work. Expansionary monetary policy, undertaken to increase the money supply and stimulate the economy, will typically lead to declining interest rates and a decrease in the value of the dollar. These declining interest rates can negatively impact the demand for dollars as investors can achieve higher returns elsewhere. In general, recessionary conditions in any economy can undermine the confidence in that currency.

Potential Benefits of a Weak Dollar

While the media has a tendency to create a gloomy picture when the dollar is in decline, the following are some of the potential benefits:

Increased Exports: A weak dollar will stimulate the demand for U.S. goods as relative purchasing power is passed to foreign countries. This increase in exports has a positive impact on the U.S. trade deficit.

Increased Tourism: While tourism represents a large part of the U.S. economy, we can expect that contribution to rise with an increase in visitors and accompanying consumption.

Foreign Investment: If the falling dollar is accompanied by declining stock and real estate prices, foreign investment can lend stability to those markets.

The Impact of a Weak Dollar on the Stock Market

Although the usual assumption is that a weak dollar is bad for the stock market, it’s interesting to note that periods of weakness do not always correlate with stock market declines. In fact, companies that have a global presence can often benefit from a weaker dollar due to the resulting global demand for their products.


The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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