Dollar Climbs Against Euro

What Is the Importance of a Strong U.S. Dollar?

by Raymond Kim on May 22, 2011

After the euro reached a high in January of about 0.78 to the dollar, the currency began a steady decline. A May surge in the strength of the American dollar brought conversion rates to the lowest of the year. As reports of economic downturns in the mid-Atlantic states trickled in, however, the euro began slowly creeping back up.

According to market analyst Joe Manimbo, the Ifo Business Climate Index “has given the euro some steam. We are seeing a little bit of profit-taking on the dollar’s rally yesterday, which has helped stocks, commodities and higher-yielding currencies find some footing.”

Various reasons for the dollar going back down can be given, but many experts point to the Federal Reserve Bank of Richmond’s manufacturing index falling to negative six in May. It had been at 10 in April, and a forecast from a Bloomberg News survey had projected it to drop only to nine.

When asked if a strong dollar was really a good thing for the U.S. economy, Treasury Secretary Timothy Geithner replied, “Yes. A strong dollar is in the interests of the United States.” Though a strong dollar is definitely a benefit to American tourists abroad, it has some drawbacks as well.

John Williamson, a senior fellow at the Peterson Institute for International Economics in Washington disagrees:

“Treasury secretaries have always made this rather absurd statement, at least since the mid-1990s. At that time, there was a good reason for it because the dollar was unusually weak, but they’ve gone on spouting the same line even when the dollar has been greatly overvalued. I think it’s just stupid.”

The reasons for cheering a weak dollar are connected to the sale of foreign goods in America. When the dollar is strong against the Korean won, businesses like Hyundai and Kia are able to sell cars in America for less than many of their American rivals. In this manner, a strong dollar results in a high trade deficit.

The U.S. dollar is the measuring stick by which other countries generally measure the health of their economy. If the dollar slips, many countries, China especially, feel that it will result in a slip in their own economy. Investors then buy into the dollar, bringing it up again. Once the world economy shows more long-term promise, however, investors may not feel the need to reinforce a weakening dollar. Oddly enough, this means that when the stock market goes down, the dollar climbs, and a weak dollar may actually mean a stronger market.

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