CurrenciesPosted by Shawn on January 30th, 2011 – 5 Comments – Posted in Finance
*Post by Shawn*
This is going to be the first of two pet peeves of mine and both concern the conclusions people jump to based on what they hear or read without really knowing much about a situation. This one is about currency valuations and how people suddenly conclude that it’s a bad thing that the dollar is weak. I understand that ‘weak’ has negative connotations and ‘strong’ has positive ones, and for that, I blame whatever economist first used those words to explain currencies. The important thing to note is that those terms represent only how much of one currency you can buy with another (e.g. how many pounds sterling I can buy with 1 USD) and is always relative (i.e. there is no objective good or bad valuation). The common misconception is that when the dollar is weak, that is bad. What most people don’t understand is that within the US (not traveling and only from a US perspective), the value of the dollar relative to other countries is essentially irrelevent – i.e. your money in your bank account isn’t losing value. In fact, a weak dollar can actually be a good thing. This makes US products cheaper abroad and thus will increase exports, creating more American jobs and raising our GDP. This does make imports more expensive, but this will again drive domestic production and jobs. This is why the US has a problem with the Chinese since they keep their currency artificially low in order to strangle imports and promote exports. And it’s important to note that currency valuation is what I like to call a secondary indicator of the economy and has no meaning in and of itself. So, if one wants to change the value of the dollar, direct currency intervention isn’t the way to do it; instead change the underlying fundamentals – i.e. if you boost the economy and make it more attractive it will naturally raise the view of the dollar. This is only a surface-scratching view of a very complex subject, which, I guess is really my point. One should be very careful jumping to conclusions without having a good understanding of a complex situation.