The terms weak dollar and strong dollar are generalizations used in the foreign exchange market to describe the relative value and strength of the U.S. dollar against other currencies. The terms "strong," "weak," "strengthening" and "weakening" are interchangeable for any currency.
Defining a Strong and Weak U.S. Dollar
A strong dollar means that the U.S. dollar has risen to a level that is near historically high exchange rates for the other currency relative to the dollar. For example's sake, if the exchange rate between the U.S. and Canada hovered between 0.7292 CAD/USD and 1.0252 CAD/USD, and the current exchange rate was at 0.7400 CAD/USD, the American dollar would be considered weak and the Canadian dollar strong.
A strong U.S. dollar means that the currency is trading at a historically high level.
The terms strengthening and weakening have the same context in that they each refer to the changes in the U.S. dollar over the period of time. A strengthening U.S. dollar means that it now buys more of the other currency than it did before. A weakening U.S. dollar is the opposite – the U.S. dollar has fallen in value compared to the other currency – resulting in fewer U.S dollars being exchanged for the stronger currency.
For example, if USD/NGN (dollar to Nigeria's naira) was quoted at 315.30, that means that $1 USD = 315.30 NGN. If this quote drops to 310.87, the U.S. dollar would be said to have weakened compared to the Nigerian naira, since $1 USD translates to fewer naira than before.
What Do Weak Dollar And Strong Dollar Mean?
Why a Strong Dollar Could Be Bad for Investors
The U.S. dollar hit its highest levels in years shortly after Donald Trump won the presidential election in November 2016. Since then, the dollar has experienced significant volatility after investors reacted to Trump's tax and international trade policies.
Even though market fluctuations could make you think otherwise, a strong U.S. dollar is not tied to a strong U.S. economy, as many pundits like to state. Strength, as noted above, is relative to other currencies where valuations are being reduced in an effort to help fuel growth. Additionally, we cannot discount deleveraging playing a role as debts are being paid off, leading to fewer dollars in the system and increasing the value of those dollars.
U.S. Dollar Impact on Multinational Companies
A strong U.S. dollar could be bad for large-cap multinationals because it makes American goods more expensive overseas. If the U.S. dollar continues to appreciate, then it could also 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 have been negatively impacted or might be negatively impacted by a strong U.S. dollar include:
Domestic Companies Insulated From the U.S. Dollar
On the other end of the spectrum, domestic companies will not be negatively impacted by the U.S. dollar. However, while the domestic economy is often advertised as strong, this is primarily based on the labor market. The labor force participation rate, not just the unemployment number is often the best indicator of labor market strength.
If you'd like a long-term stock selection approach without having to worry so much about a U.S. dollar impact, the following companies may be worth further analysis:
The Bottom Line
The strength or weakness of the U.S. dollar will impact FX traders and, in general, any international currency plays. On a stock selection level, a declining U.S. dollar means it may be prudent to consider staying away from multinationals and looking into companies that only have domestic exposure, as they are less impacted on a relative basis.