What is meant by the phrase “strong dollar”? Is it a dollar that cannot be broken? Is it when the dollar is a mean bully to the rest of the currencies? I think people intuitively associate a “strong dollar” or a “strong currency” with economic strength. But, it is really an objective term, not a subjective term.
A “strong dollar” is when a dollar can respectively buy more of another country’s currency, and therefore goods, with respect to some historical context. Complicated? Think of it this way: A few years ago, it cost around $1.30 to purchase 1 euro (€ 1). As time progressed to the present day, it has taken less and less dollars to purchase a euro. Today you can buy € 1 for $1.07. That means, the dollar has strengthened significantly against the euro.
What caused the dollar to strengthen in value? One possibility is demand for goods and services produced in the European Union declined, so people needed less euros to purchase those. Or, demand to purchase goods and services produced in the United States increased, and so more dollars were demanded. Just because demand for our exports increase, doesn’t mean our overall economy is doing better. Our GDP does increase when we export; however, exports are a relatively small part of our economy. In 2015, our exports totaled $1.51 trillion, while our total GDP was $17.91 trillion. Never mind that the US imported $2.31 million in 2015.
So, if the dollar is strong, it means we can purchase more foreign goods and services. That is good, right? It is, if you are heavily dependent on purchasing imports. We see that the United States purchases significantly more imports than exports, so it helps considerably when the dollar is strong. Our main imports are computers, electronics, crude oil, and cars. We buy all of these more easily when the dollar is strong.
What happens when the dollar is weak? Then it becomes easier for other people to buy exports from us. Our main exports are refined oil (especially gasoline), cars, aircrafts, electronics and industrial equipment. When the dollar is weak, it means other countries will buy more of these things from us. This is why China has long desired a weak currency, because it makes it easier for other countries to buy their exports.
Locally, we export things like beef, corn and soybeans. This means agricultural producers benefit more from a weak dollar than a strong dollar. Another local export, crude oil, is uniquely affected by currency changes too. Most oil throughout the world is priced in dollars. So when the dollar becomes weaker, but the demand for oil hasn’t changed, oil actually becomes more expensive. When the dollar becomes stronger, then it buys more oil, and the price of oil falls. This means, a weak dollar helps support higher prices on oil, which in turn creates more demand for oil.
Now you see, a “strong dollar” doesn’t necessarily mean good things for the economy and a “weak dollar” doesn’t necessarily mean bad things for the economy either. A strong or weak currency is really more of an unbiased idea that alone doesn’t mean anything good or bad in isolation. We need to consider the context of the greater economy, and who the winners and losers are with imports, exports and commodities.