Question: The dollar is said to be weak. What does that actually mean?

Joan Schultz

Answer:

Dear Ms. Schultz,

Literally speaking, a weak dollar is one that can be exchanged for a decreasing amount of a foreign currency, say the British pound or the 13-nation Euro. In other words, when the U.S. dollar is weak, it cannot buy as much of another country's currency, products or services as when it is strong.

The dollar vs foreign currency rates change from day to day. Right now, the dollar is weak against certain currencies, including the Euro. The Euro, in fact, is at its highest since it was introduced in 1999 -- this week it climbed to $1.39 against the dollar.

Many economics believe that the current downward pressure on the dollar is due (to some extent) to the trouble in subprime mortgages which we discussed in a previous column. Click HERE to read.

The strength or weakness of the dollar, of course, also has an impact on imports and exports. That's because goods and services from a foreign country are typically purchased in the currency of that country. Therefore, a weak dollar usually leads to a higher level of U.S. exports (a plus for many multinational companies) and, on the other hand, a lower level of foreign imports.

The weak dollar also affects travel, making it expensive for Americans to vacation or do business in countries where the dollar is weak against the local currency.

One area that usually benefits from a weaker dollar (in addition to certain multinational companies) is gold, with investors turning to gold stocks and mutual funds. Even though gold is high right now, around $710, it's important to remember that it is a very volatile commodity. If you are concerned about a weak dollar, do not put all your money in the gold basket. Gold should only by one component of your portfolio, if at all.

To summarize...

The advantages of a weaker dollar

• U.S. firms find it easier to sell goods in foreign markets.
• U.S. firms are under less competitive pressure to keep prices low.
• More foreign tourists can afford to visit the U.S., benefiting a wide variety of American businesses.

Disadvantages of a weaker dollar

• American consumers wind up paying higher prices for foreign products and foreign services.
• These higher prices may contribute to a higher cost-of-living for Americans.
• Traveling abroad, for pleasure or business, to those countries where the dollar is weak is more expensive.
• It's more difficult for U.S. firms to expand into those foreign markets where the dollar is weak.

Bottom Line: When the dollar is weak, it takes more dollars to purchase foreign goods and services. That means U.S. consumers and U.S. companies that import products have reduced purchasing power.

At the same time, a weak dollar means prices for U.S. products fall in foreign markets. This benefits U.S. exporters because consumers in other countries can buy more U.S. products with less money.

$TIP: There are a number of currency converters online, easily found via google. However, www.oanda.com is unique in that it provides information and conversion calculators for both currency traders and travelers.

Good luck!