Understanding the US Dollar's Impact on Your Finances

The strength of the U.S. dollar is a good indication of how well the stock market is doing.

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The value of the U.S. dollar goes up, and the value of the U.S. dollar goes down. But what does it mean for everyday Americans? How are we impacted by what happens when our currency rises or falls?

What causes a rise or fall?

Part of an investor's job is to make predictions. One of the things investors worldwide try to predict is which countries are likely to produce the most profitable companies, which markets are likely to enjoy the most significant increases in value.

Let's say you're an investor here in the U.S., and based on a few key companies in India, you believe the Bombay Stock Exchange (BSE) will soon be setting the pace for the rest of the world. You want to get in on the profits you suspect are around the corner, so you invest. Because it's an Indian stock exchange, you exchange dollars for rupees and make your investments.

The same is true when investors worldwide look at the U.S. market. If it seems to them as though U.S. businesses are in for a season of growth, they exchange their currency for U.S. dollars and make investments in U.S. stocks, bonds, mutual funds, real estate, and other vehicles for growth.

The more investors demand dollar-based investments, the higher the value of the U.S. dollar climbs. When you hear the value of the dollar is down, you know it's because demand for U.S. investments is down. When it's up, demand is up.

What this means for the average American depends on where they're at in life.

American-made products

As the cost of products manufactured in the U.S. increase, everyone -- including Americans -- begin to purchase more imports. U.S. retailers are the first to buy imports to keep their prices low. American families shop at those retailers to save on the goods they want and need.

The longer the dollar is strong, and imports are the most cost-effective alternative, the less demand there is for American goods. The less demand, the better the odds of layoffs, particularly in manufacturing.

Whether it's good news or bad news depends on who you are. For someone looking for a job in manufacturing, a strong dollar represents lousy news because it means there are fewer jobs to go around.

Purchasing power

Say a couple wants to spend time traveling abroad. A strong U.S. dollar is an excellent travel companion. That's because a single American dollar has more purchasing power in a country with a weaker currency. Depending on how strong the dollar is and how weak the currency is elsewhere, that couple may find themselves with enough money to extend their vacation.

And for an American family with secure employment, the ability to buy foreign-made imported goods for a low price may be good news, leaving money in their bank accounts that can be used in other ways.

Tourism

When the dollar is strong, investors around the world want a piece of the action. However, tourists do not. That's because it becomes more expensive for foreigners to travel to and around the U.S. when exchanging their currency for ours, meaning they're losing money.

Is it good news or bad?

A strong dollar means the overall U.S. economy is doing well, and that's good news for many sectors. Whether it's good for a specific individual or family depends on the industry in which they are employed, whether they own a business, where they live in the U.S., their buying habits, and other factors that make them unique from their neighbors.

Bottom line

Most things in life are cyclical, and few things last forever. That is undoubtedly true of anything related to the economy. Just as we have bull markets and bear markets, high interest rates, and low interest rates, the strength of the U.S. dollar rises and falls. What it means to you depends not only on where you are in life but also on how prepared you are to weather the ups and downs of the economy.