The terms "weak dollar" and "strong dollar" are used to describe the current value of U.S. currency in comparison to other major currencies.
The values of about 170 currencies fluctuate constantly in the foreign exchange, or Forex, markets. However, just four currencies are used as benchmarks and they are routinely compared to each other as a measure of relative strength or weakness. They are the British pound, the Japanese yen, the euro, and the U.S. dollar.
In terms of its impact, a strong dollar means that goods exported by the U.S. are relatively pricier for foreign customers to buy, while imports to the U.S. are relatively cheap. A weak dollar means American consumers must spend more dollars to buy the same imported goods but are a relative bargain abroad.
Key Takeaways
- The U.S. dollar is considered strong or weak in comparison to the values of other major currencies.
- A strong dollar means U.S. exports cost more in foreign markets.
- A weak dollar means imports are costlier for American consumers to buy.
- The value of the U.S. dollar fluctuates constantly in response to market demand.
Strong vs. Weak Dollar
A strong dollar is an exchange rate that is historically high relative to another currency.
For example, if the exchange rate between the U.S. and Canada hovered between 0.70 CAD/USD and 0.83 CAD/USD during the five years that ended in late December 2023. If the exchange rate was at 0.82 CAD/USD, the American dollar would be considered weak and the Canadian dollar strong.
In real life, that would mean Canadian consumers could buy American imports for a little less money while Canadian products would be a bit costlier for American consumers.
World's Weakest Currency
The world's weakest currency as of 2023 is the Iranian rial. The rial hit the skids as long ago as 1979 when the nation's Islamic Revolution led many businesses to flee the country. Years of economic sanctions and out-of-control inflation have followed. The government devalued the currency by 600% in 2020 and renamed it the Toman.
How a Strong Dollar Affects Business and Investing
A weak dollar is not necessarily bad, nor is a strong dollar necessarily good. A weak dollar makes imported goods more expensive for American consumers to buy, but it makes American goods a relative bargain abroad. American companies with a global reach can do well when the dollar is weak while losing some sales when the dollar is strong.
Travelers are particularly affected by the current value of their home currencies. If an American travels to London when the dollar is strong, their dollars will stretch farther. Companies in the travel industry will see the impact. Package tours become more or less affordable as the value of the dollar fluctuates.
Two Sides of the Coin
Currency valuations are always viewed as a comparison between two currencies. The U.S. dollar may be strong only because the British pound is weak, or vice versa. For example, the British pound fell to $1.14, its lowest level in 37 years, on Sept. 7, 2022.
The crisis occurred in the U.K., not in the U.S. Soaring inflation and economic uncertainty following the Brexit vote led to a loss in confidence in the pound.
Impact on Multinationals
A strong U.S. dollar can be bad for multinational companies because it makes American goods more expensive overseas. If the U.S. dollar continues to appreciate, it could have a negative long-term impact because those overseas consumers will begin to turn away from American brands.
The sectors impacted most by a strong dollar are technology, energy, and basic materials, but the large-cap names that have and could continue to see their earnings take a hit go well beyond these three sectors.
Some of the names that are vulnerable to the effects of a strong U.S. dollar include:
- General Motors Co. (GM)
- 3M Company (MMM)
- Procter & Gamble Co. (PG)
- Estée Lauder Companies Inc. (EL)
- International Business Machines Corp. (IBM)
- Chevron Corp. (CVX)
- DuPont de Nemours Inc. (DD)
- United Technologies Corp. (UTX)
- Accenture Plc (ACN)
- Oracle Corp. (ORCL)
Domestic Companies Insulated From the US Dollar
On the other end of the spectrum, domestic companies are not negatively impacted by a strengthening U.S. dollar.
Investors interested in a long-term stock selection that is relatively safe from currency fluctuations might consider companies like these for further analysis:
- Alaska Air Group, Inc. (ALK)
- Dollar General Corp. (DG)
- The TJX Companies, Inc. (TJX)
- CVS Health Corp. (CVS)
- The Allstate Corp. (ALL)
- UnitedHealth Group Inc. (UNH)
What Causes the U.S. Dollar to Strengthen?
Demand for U.S. dollars causes it to strenthen in relation to other currencies. The currency market experiences continual demand from banks, investors, and speculators. The buyers may be exchanging euros or pounds for dollars in order to complete international business transactions. They may be speculating that the U.S. dollar will rise in value. In any case, demand for dollars increases its value against the currencies that trade against it.
What Causes the U.S. Dollar to Weaken?
A weaker U.S. economy can cause its currency to decline in value. When U.S. unemployment rises and consumers cut back, so-called "trader sentiment" can turn sour on U.S. investments in general. Foreign traders may cash in American stocks and bonds and exchange the proceeds for other currencies to keep their money safer until the U.S. economy turns around.
How Can I Follow the Value of the U.S. Dollar?
The U.S. Dollar Index tracks the value of the dollar against six currencies: the euro, the Swiss franc, the Japanese yen, the Canadian dollar, the British pound, and the Swedish krona. It has a base of 100.
The index can be viewed under the ticker symbol DXY.
The Bottom Line
The strength or weakness of the U.S. dollar most directly affects foreign exchange traders. Multinational companies are vulnerable to the effects of currency fluctuations on the spending power of their customers abroad. A historically strong U.S. dollar may cause stock investors to look into companies that make their money mostly or entirely in their home countries.
