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April 05, 2010

Strong or weak?

We hear about the dollar strengthening or weakening against foreign currencies. Is it better if the dollar strengthens?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well maybe. It depends on what side of the fence you are on ... . And this is one of those things where ... people automatically think, 'Well, strong is good; weak is bad; must be that a strong dollar is good.'

"Well, actually, if you are an exporter, let's say, if you are a company like many in our state and in our nation who make products and sell them in foreign countries, you actually want a weak dollar. Because a weak dollar actually makes our exports in those foreign countries cheaper, and our exporters therefore can sell more things.

"On the other hand, if you are an importer you want the opposite. You want a strong dollar because that makes obviously imported products cheaper, and with a strong dollar you can buy more of those. So it really depends on which side of the import export fence that you face.

"Ultimately though the dollar's movement is related to trade balances. If we do develop a big trade imbalance ... importing a lot more than we are exporting, that is actually going to put downward pressure on the dollar. Which will make our exports stronger, make our imports more expensive and that tends to at least reduce that trade balance.

"So think of a teeter-totter here. The value of the dollar is something that in the long run tries to work to balancing imports and exports."

Posted by deeshore at April 5, 2010 08:51 AM