The benefits and costs of the falling dollar can be far-reaching. A weak dollar can provide a foundation to stabilize the economy.
At the same time, a weaker dollar can mean different things for foreign economies. One thing’s for sure if the dollar keeps falling, the financial markets will reflect it.
A weak dollar can increase foreign demand while keeping US consumer demand domestic. A weaker dollar can make US goods much more competitive in the international market and this will impact the sales of US corporations and manufacturers.
A weaker currency can also mean to higher tourism and corporate acquisitions and mergers. Although foreign investors who already own dollar-denominated assets will have serious concerns, this presents a great opportunity for investors seeking to gain exposure to US investments.
Whereas US exports will increase, a weak a dollar will mean lower imports. This can, in turn, hurt other economies like China and India.
A cheaper currency means US corporations become highly attractive for acquisitions. So governments usually don’t panic when the currency gets weaker as it helps the economy more than hurt it. Further, it will also mean temporary economic growth and lower inflation.
From an investment standpoint, a falling dollar will mean a lot of economic activity. So investors who want to take advantage of the situation need to focus on acquisitions and currency movements.
The long-term disadvantage of a falling dollar is inflation. Usually, when the dollar falls, we see oil prices rise. Commodities usually follow suit when inflation sets in.
Inflation is always a problem as consumers cannot handle higher prices. Further, oil prices usually have a strong correlation with consumer prices, so if the currency continues to get weak, the threat of inflation will become very real.
If inflation gets out of control, the Federal Reserve will usually lower interest rates. Although it will take time, in the long term it can lead to bubbles in the financial market. This will make the Federal Reserve to step back in and hike interest rates.
So all these movements will affect any investments that you may have in the US and some other parts of the world where the economy is tightly connected to the US. For example, if the US dollar falls, the Chinese will probably diminish the value of the Yuan to ensure that exports don’t take a major hit.
The bottom line is when a powerful currency like the US dollar falls, it will have far-reaching ripple effects. As a result, investors need to pay close attention to protect and benefit from their investments.