In looking at the exchange rate between two currencies, the appreciation or strengthening of one currency must mean the depreciation or weakening of the other. Figure 1 b shows the exchange rate for the Canadian dollar, measured in terms of U. The exchange rate of the U. With the price of a typical good or service, it is clear that higher prices benefit sellers and hurt buyers, while lower prices benefit buyers and hurt sellers. In the case of exchange rates, where the buyers and sellers are not always intuitively obvious, it is useful to trace through how different participants in the market will be affected by a stronger or weaker currency.
Consider, for example, the impact of a stronger U. Figure 2. Exchange rate movements affect exporters, tourists, and international investors in different ways. For a U. A strong U. When this exporting firm earns foreign currencies through its export sales, and then converts them back to U.
As a result, the firm may choose to reduce its exports, or it may raise its selling price, which will also tend to reduce its exports. Conversely, for a foreign firm selling in the U. Each dollar earned through export sales, when traded back into the home currency of the exporting firm, will now buy more of the home currency than expected before the dollar had strengthened.
As a result, the stronger dollar means that the importing firm will earn higher profits than expected. The firm will seek to expand its sales in the U. In this way, a stronger U. The tourist receives more foreign currency for each U. Imagine a U. Clearly, was the year for U. A weaker dollar means the foreign currency buys more dollars, which means that U. Step 3. Summarize that a weaker U. For a foreign exporter, the outcome is just the opposite.
Step 4. Suppose a brewery in England is interested in selling its Bass Ale to a grocery store in the United States. Step 5. Summarize that, from the perspective of U. This leads to a decrease in U. Step 6. Consider U. They face the same situation as a U. A weaker dollar means that their trip will cost more, since a given expenditure of foreign currency e.
The result is that the tourist may not stay as long abroad, and some may choose not to travel at all. Step 7. Consider that, for the foreign tourist to the United States, a weaker dollar is a boon. It means their currency goes further, so the cost of a trip to the United States will be less.
Foreigners may choose to take longer trips to the United States, and more foreign tourists may decide to take U. Step 8. What Is a Weak Currency? Key Takeaways There can be many contributing factors to a weak currency, but a nation's economic fundamentals are usually the primary one. Export dependent nations may actively encourage a weak currency in order to boost their exports. Currency weakness or strength can be self-correcting in some cases.
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Managed Currency A managed currency is one whose value and exchange rate are affected by the intervention of a central bank. The USD is the abbreviation for the U. Weak Dollar Definition A weak dollar is a sustained period of depreciation in the United States' currency. What Is Currency Depreciation? Currency depreciation is when a currency falls in value compared to other currencies.
Easy monetary policy and inflation can cause currency depreciation. By using the U. This also holds true for the U. If the dollar is strong, then the cost of imported goods such as electronics, cars, and food becomes cheaper. This means the American consumer will pay less for those items. All of that sounds great, right? Well, there are two sides to every coin. One of the downsides to a strong dollar is that it becomes more expensive for foreign countries to buy products made in the U.
That means our exports will decrease. This is a disadvantage for U. In addition, if the U.
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