Table of Contents
The U.S. dollar is mostly used in international transactions and is preferred as the key reserve currency. Whereas it is an official currency in many countries, in others it is a de facto one. Similarly, some nations use this currency for paper money only, while producing their own coins, or receive the latter from the USA to use for payment in dollars. There has been a deliberation on whether countries should continue to maintain their high or low exchange rate. This debate revolves around their recent economic and political goals. The paper explores the current exchange of the U.S. dollar as compared to currencies of other countries and the effects on the economy of the USA.
Comparison between the U.S. Dollar and Other Currencies
Whereas the euro-dollar rates have been more or less stable since 2015, the U.S. dollar has appreciated greatly. In 2015, it appreciated by 11.4% and 5.8% against the euro and British pound respectively. Furthermore, the U.S. dollar appreciated by 19.9% against the Canadian dollar and 12.5% against the Australian currency. Yuan depreciated by 1.8% and 4.0% against the dollar in August and November 2015 respectively. In the same year, the economy of the USA grew by 2.5% followed by an increase by 2.4% in the UK (Potter, 2016).
Effects of Appreciation
When the U.S. dollar appreciates as compared to other currencies, the price for imports becomes cheaper. Thus, people can buy more foreign currencies for the dollar to purchase foreign goods. This situation is very important to most companies in America that intend to import more items and raw materials to manufacture their goods. The low cost of materials from other countries provides firms with a higher profit margin (Hayes, 2015).
When the exchange rate of the U.S. dollar becomes strong, imports will also be cheap. The American will therefore spend little money on foreign goods. Therefore, many companies in the country will in turn be under pressure to lower their prices to remain competitive. It increases money in the pocket and improves the standards of living of many people. Moreover, cheaper consumer goods increase a disposable income of Americans making them spend more money on fun, shopping, entertainment, and vacations. Similarly, such sectors of the economy as restaurants, casinos, and travel companies will benefit from the appreciated dollar.
Balance of Trade Deficit
Strong currencies lead to cheaper imports, making the country import more goods than it exports. It causes a trade deficit that leads to a negative effect on the economy. When the currency is strong, local goods are expensive to other countries. As a result, most nations will buy few products from the USA. The demand for the same goods becomes low, which in turn lowers the GDP. Manufacturing companies are more affected because of competition in the global market, incurring a huge loss.
Negative Effects on International Trade
A strong currency has a negative impact on international trade. It reduces the number of tourists visiting the country. In addition, many U.S. multinationals selling their goods and services across the globe face reduced sales and earnings. For example, in January 2015, most of the leading U.S. companies such as the Microsoft Corporation complained that the strong dollar would affect their sales and earnings negatively (Hayes, 2015).
The U.S. dollar is used by many countries as an international currency making it appreciated for a long period. Recently, it has risen sharply as compared to other currencies, and there is still more room for an increase in the global market. With the appreciation of the dollar, the U.S. citizens benefit from cheap imports and low inflation. At the same time, the strong dollar leads to the balance of trade and affects international trade with many multinational companies reducing their sales and earnings.