You may have read recent news stories that talked about how the American dollar has weakened against various currencies. One news blurb, delivered before the Federal Reserve meeting in September, read:

The euro rose to record highs and the dollar plummeted to a new low against the European currency at 1.39 The dollar's attractiveness to global investors diminished amid expectations that the Federal Reserve is to cut interest rates next week. The Euro is at its highest level since the single European currency was launched in 1999.

The terms, "highs" and "lows," and the fact that the dollar's attractiveness to global investors "diminished" amid the rumors of a rate cut may or may not be familiar to you. These are relative terms that are used in foreign exchange markets, also known as Forex. When a currency "strengthens," its value has risen in relation to one or more other currencies, such as the Japanese Yen or the Euro. When a currency "weakens," the opposite occurs - the currency loses value in relation to various currencies. The Yen and Euro are just two of many currencies that trade in international Forex markets.

But, a strong or weak dollar means much more than relative strength, as fluctuations in the dollar's value also affects import and export markets and even whether you decide to vacation overseas.

When Americans experience a weak dollar, the downsides are as follows:

• Consumers face higher prices on foreign goods and/or services (such as products from China). Higher prices on foreign products contribute to higher cost-of-living;
• U.S. consumers find that travel abroad becomes costly, and;
• It becomes more difficult for U.S. firms and investors to expand into foreign markets.

On the other hand, a strong dollar has its downsides as well:

• U.S. firms find it harder to compete in foreign markets, because these firms must compete with lower priced foreign goods and/or services;
• Foreign tourists find it more expensive to visit the U.S., and;
• It's more difficult for foreign investors to provide capital to the U.S. in times of heavy U.S. borrowing.

Overall, it's advantageous for American consumers to experience a strong dollar, as those consumers experience lower prices on foreign products/services, and lower prices on foreign goods and/or services help to keep inflation low. American consumers also benefit when they travel to foreign countries, as the dollar can purchase more foreign currency. Additionally, U.S. investors can purchase foreign stocks and/or bonds at "lower" prices.

Who benefits when the dollar is weak? Just reverse the downsides to the strong dollar:

• Although American consumers experience higher prices on foreign imports, U.S. firms find it easier to export to foreign markets;
• While American consumers might experience a higher cost of living, U.S. firms find less competitive pressure to keep prices low abroad;
• Even though it might be more difficult for Americans to travel abroad, more foreign tourists can afford to visit the U.S., and;
• As a result, U.S. capital markets become more attractive to foreign investors.

In the snippet at the beginning of this article, the writer stated that, "The Euro is at its highest level since the single European currency was launched in 1999." This remark coincides with another news article that stated:

Although the housing slump that has affected much of our nation has prompted many Americans to postpone buying a primary residence or second home, the downturn has actually helped to encourage foreign buyers to look for property here -- especially in popular second-home markets -- partly because U.S. prices are now a lot lower than many foreign buyers would have to pay for a comparable property in their native land.

As you can see, the weak dollar benefits foreigners as more American currency can be purchased with some foreign currencies. But, not all foreigners are purchasing American real estate. Some tourists would just rather vacation or shop in New York or in other cities. As a consequence, airlines need to fill seats on flights from America to other countries, so they often drop prices to fill that need.

The dollar also will continue to suffer from America's expanding trade deficit with the rest of the world, along with its soaring U.S. budget deficit. In other words, the U.S. is borrowing at a faster rate than incomes can support. Additionally, the interest rate cut that Americans experienced on 18 September continued to make it easy for the dollar to slide further down the scale. When mortgage problems escalated in August, the combination of these issues continues to weigh down the domestic economy.

But, as I mentioned in the article on Ben Bernanke, this Federal Reserve chairman knows how to avoid deflation - and a weak dollar is one tool that he can use to lower the perception of high national debt.

As an investor in the current situation, you might think about the adage, "Buy American," for your portfolio, as American products and services might see a surge that lasts longer than the immediate stock market reaction to the interest rate cut. Look again at the list that shows who benefits from a weak dollar. U.S. firms find it easier to expand abroad, and foreign investors find American markets attractive when the dollar is weak. A combination of both factors could buoy prices in certain commodities and services. With that said, imports and foreign stocks (depending upon the country) might be too inflated to think about at the moment.

Also, keep an eye on the Federal Reserve. If they cut interest rates even further, you might invest in a little real estate to create diversity for your long-term investments, provided you have the credit history that allows you to land a loan. If you pay attention to dollars and some common sense, you can benefit from a weak dollar as well.

Until Next Week,
Linda Goin