Is a Strong Dollar a Good Thing?

Chart of the Week for August 22-28, 2003

The present rally in U.S. equity markets has coincided with a general weakness in the dollar versus other foreign currencies. Early in the rally the exchange rate stood near $1.05 per Euro, but by the end of the second quarter the exchange rate had risen to $1.15 per Euro. What this meant was that the same European goods costing $1.05 in late March, cost $1.15 by the end of June. Or, inversely, foreign investors who could purchase U.S. goods for 0.95 Euros in March, only needed to pay 0.87 Euros for the same goods by the end of June. This depreciation in the strength of the dollar is helpful for U.S. businesses in two ways. First, since the weak dollar makes foreign goods more expensive for U.S. consumers and U.S. goods cheaper for foreign consumers, more U.S. goods will be purchased by both groups as substitute products. Second, as more sales are made overseas in stronger foreign currencies, they generate higher revenues when converted back into U.S. dollars. In turn these higher revenues increase profits. Now, with the dollar again strengthening, fears are rising that the improved sales, revenue, and profit figures will be unsustainable.

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