There’s been a lot of talk about the value of a dollar recently. And not just from ornery adults berating the laziness of millennials. But what is a weak dollar, exactly?
And more importantly, why is it suddenly in the news — and why should you care?
[See: 7 of the Best Dividend Stocks to Buy for 2018.]
What happened? On Jan. 24, Treasury Secretary Steven Mnuchin, speaking at the World Economic Forum in Davos, seemingly departed from the longtime U.S. stance on the value of the greenback, saying, “obviously a weaker dollar is good for us as it relates to trade and opportunities.”
The value of the dollar — measured against a basket of foreign currencies — immediately fell, sliding about 2 percent to three-year lows as currency traders rushed to sell.
How fluctuations in the dollar affect you. When the U.S. dollar (USD) weakens, American exports become more affordable to foreign trading partners, whose own currencies suddenly wield more buying power. In turn, American goods look cheaper to them, which often drives up U.S. exports.
These are the benefits Mnuchin was referencing — the Trump administration likes more exports because it means more business for American companies, and more business means more jobs, particularly in manufacturing.
Conversely, imports from U.S. overseas trading partners become more expensive. Foreign countries aren’t a fan of this, because the United States is not only the largest economy in the world, but the largest importer in the world, too. It also has run the world’s largest trade deficit every year since 1975, meaning imports far exceed exports each year. In 2016, the U.S. trade deficit was $502 billion.
A weaker dollar tends to narrow the trade deficit, which is not what America’s biggest trading partners — China, the EU, Canada, Mexico, Japan, and others — would like to see.
Some fear a weaker dollar could mean higher import prices and higher prices at the pump, both of which could jump-start inflation. That said, with the Federal Reserve expected to tighten monetary policy with at least three interest rate hikes this year, the central bank could serve to strengthen the dollar.
Ultimately, Mnuchin’s bold break from decades of U.S. policy could raise international tensions, and some worry it could spark a trade war with China or other trade partners. Earlier this week, the U.S. slapped big tariffs on washing machines (up to 50 percent) and solar panels (up to 30 percent). An aggressive posture like this, which is indeed in line with Trump’s “America First” policy, runs a risk of backfiring as U.S. trade partners impose retaliatory tariffs.
[Read: What’s the Best Bitcoin Wallet?]
At the end of the day, a weak dollar can impose a tax on the U.S. consumer, who may pay more for imported goods.
What does a weak dollar do to markets? Big fluctuations in the dollar can cause major market moves as well. Since Trump’s election, the USD has lost more than 10 percent of its value — considered a large move in currency markets — and reached a three-year low this week in the wake of Mnuchin’s comments.
Here are some industries — and therefore stocks — that could benefit from a lower dollar:
— Large multinationals with significant overseas sales, such as The Coca-Cola Co (NYSE: KO).
— Major exporters.
— Companies in the commodities business. Commodities are priced in dollars, so when USD falls, prices go up.
— Companies that thrive when commodities thrive. Caterpillar (CAT) is a good example.
— U.S. tourism attractions.
On the flip side, where there are winners, there must be losers, too:
— Importers
— Companies with large commodities and raw materials expenses. Ford Motor Co. (F) expects lower profits in 2018, in part due to the rising cost of raw materials.
— Airlines and travel businesses with international exposure. Not only does the success of an airline depend disproportionately on the input cost of fuel, but fewer U.S. customers traveling abroad could hurt business, too. That’s a double-whammy for Delta Air Lines (DAL), American Airlines Group (AAL), United Continental Holdings (UAL) and the like.
Admittedly, all these interdependent relationships can be tough to keep straight. The humble greenback is such an underpinning part of everyday life and global trade that gyrations in its value can have large and sometimes unintended consequences on a huge range of areas.
[See: 7 of the Best Stocks to Buy for 2018.]
Ultimately, no one knows for sure if the USD will continue to weaken or end up bouncing back — but now you have a good idea of what moves, and which way, when the dollar does.
More from U.S. News
7 of the Best Blue-Chip Stocks to Buy for 2018
7 of the Best Tech Stocks to Buy for 2018
7 of the Best Energy Stocks to Buy for 2018
What Is a Weak Dollar, Anyway? originally appeared on usnews.com
