DEFINITION of Weak Dollar
A weak dollar is a situation where the U.S. dollar's value is decreasing relative to one or a basket of foreign currencies. Essentially, a weak dollar means that a U.S. dollar can exchange for fewer amounts of foreign currency. A number of factors, not just economic fundamentals, can lead to a period of U.S. dollar weakness.
The term weak dollar is used to describe a sustained period of time, as opposed to a 24 to 48-hour decline in the greenback.
BREAKING DOWN Weak Dollar
Much like the economy, the strength of a country's currency is cyclical, so periods of strength and weakness are inevitable. Reasons for the U.S. dollar depreciating range from economic fundamentals, geopolitical events and offshore influences.
During a period of fiscal tightening, when the U.S. Federal Reserve is raising interest rates the U.S. dollar is likely to strengthen. As investors earn more money from higher yields, it will attract offshore investment, which pushes the U.S. dollar higher. Conversely, a weak dollar occurs during a period of fiscal easing when the Fed is lowering interest rates.
In response to the Great Recession, the Fed embarked on its infamous quantitative easing where it purchased large sums of Treasuries and mortgage-backed-securities. In turn, the bond market rallied, which pushed interest rates in the U.S. to record lows. As interest rates fell, the U.S. dollar weakened substantially. Over a period of two years (mid-2009 to mid-2011) the U.S. dollar index (USDX) fell 17 percent.
However, four years later as the Fed embarked on lifting interest for the first time in eight years, the plight of the dollar turned and it strengthened to make a decade-long high. In December 2016, when the Fed shifted interest rates to 0.25 percent, the USDX traded at 100 for the first time since 2003.
Tourism and Trade
Depending on the type of transaction that a party is participating in, possessing a weak dollar is not necessarily a bad situation. For example, a weak dollar may be bad news for U.S. citizens wishing to vacation in foreign countries, but it could be good news for U.S. tourist attractions, as it also means that the U.S. would be more inviting as a destination for international travelers.
More significantly, a weak U.S. dollar is good the country's trade deficit. As the U.S. dollar weakens, its exports become more competitive on the foreign market as they have become cheaper for offshore buyers.
The weak dollar debate has become a political constant in the 21st century. Numerous arguments between U.S. and Chinese regimes over the strength of each others countries have occurred where the U.S. has threatened to officially label China a currency manipulator.