The dollar's value refers to the purchasing power of the dollar versus other currencies, or the exchange rate between the two currencies. When the dollar is strong, foreign goods are relatively less expensive. This can benefit businesses that import raw materials or manufactured goods into the United states, such as
Wal-Mart Stores (WMT). A weakening dollar benefits companies with foreign competitors, such as
US Steel (X), as their competitors' goods become more expensive. A weakening dollar can also lead to
rising interest rates, as investors require higher rates to compensate for the added currency risk. Higher interest rates, in turn, have significant consequences for the
housing market and business investment in general. A strong dollar means lower oil prices, as the US purchase much of its oil abroad. As the dollar weakens oil producers charge more to protect their margins.
The US Dollar has fallen consistently vs. the Euro
[edit] Companies that benefit from a rising dollar
- Volkswagen and DAIMLERCHRYSLER AG (DCX) and EADS NV all sell foreign cars and airplanes to the US. All three companies benefit when the dollar rises.
- Wal-Mart benefits from a rising dollar as it makes it goods in China but sells them in the U.S.
[edit] Companies that benefit from a falling dollar
- As the dollar falls, US exports become relatively less expensive. Boeing which sells a substantial portion of its products to foreign customers stands to benefit. 3M Company (MMM) also benefits from a falling dollar.
- As the dollar falls, travel to the US becomes less expensive for foreigners and foreign travel becomes more expensive for US residents. The Walt Disney Company, which benefits, operates two theme parks within the US in addition to a cruise line. Marriott International (MAR), Hilton Hotels (HLT) Starwood Hotels & Resorts Worldwide (HOT) are all US-based hotels which benefit from a falling dollar.
- Advanced Medical Optics (EYE), which gets 58% of revenues from outside of the United States, benefits from a falling dollar, which makes its exports more competitive.
[edit] Factors affecting the dollar
[edit] Trade Deficit
A trade deficit occurs when a country imports more than it exports. This leads to a net outflow of a country's currency. Countries on the other side of the transaction will typically sell the importing country's currency on the open market. As supply of the country's currency increases in the global market the currency depreciates. As a net importer, the US has seen its trade deficit grow rapidly over the last decade. In 2006 the US had a record deficit of 765 billion dollars.
[edit] Budget Deficit
US Public debt has grown substantially over time
When a country's government spends more than it earns from taxes or other sources of revenues, it is forced to borrow from its citizens and/or from foreign entities. As a country's debt load increases, the value of its currency may decrease as result of fears within the international community over its ability to repay the debt. Currently, the US is the world's largest debtor with approximately 9 trillion dollars in debt held by the public (includes intergovernmental and debt owed by States, corporations and individuals). Over half of the debt held by the public is held by foreigners.
[edit] China and Japan
Japan($349B) and China($643B) are two of the largest purchasers of US debt. China in particular has exbited a voracious appetite for US debt. Its rapidly growing economy is heavily dependent on exports, and the US is one of its largest trading partners. In any given year, the US imports much more from China than it exports to China. As a result there is a net flow of dollars to China. Normally, one might expect China to sell these dollars on the global market, causing the dollar to weaken. Instead China reinvests its dollars in US debt. In doing so, China stregthens the US dollar and limits the appreciation of its own currency. Chinese exports remain cheap to American consumers.
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