The United States currency is the Dollar (US$) and its strength is measured in three distinct ways – through exchange rates, through treasury notes and through foreign exchange reserves. The easiest way of measuring the strength or weakness of the dollar is through the exchange rate. . The “exchange rate” is defined as the “value of a country’s currency expressed in the currency of another country” . By using the exchange rate, a country can determine the value of all its economic activities in comparison with other countries. The exchange rate is traded on what is known as a “foreign exchange currency market” or “forex”. The forex is a good measure of a country’s economic activity and is affected by a country’s level of outside debt, interest rates, investor confidence, among other factors. We say that the dollar is “strong” when we can exchange one dollar for an increasing amount of currency of another country. We say that the dollar is “weak” when we can exchange less currency of another country for one dollar . There is a profound effect of the relative strength of the US Dollar on the country’s exports and imports because goods and services are purchased using the currency of the nation that produces it. Hence, goods and services of the US are procured in US Dollars while those from abroad are purchased using the producer’s home currency. For imported goods, if the US Dollar is strong then the relative value of imports is cheaper since it requires less US Dollars to pay for them. If the Dollar is weak then importing the same amount of goods or services becomes more expensive. For exports, a strong dollar means that the goods and services produced by the US is more expensive that the same product produced elsewhere while a weak Dollar means US produced goods and services are more competitively priced. Clearly there is a balance that must be found because the strength of the dollar influences the economy in a very significant way.
References
Amadeo, K. (2013). Value of the U.S. Dollar. Retrieved June 18, 2013, from About: http://useconomy.about.com/od/tradepolicy/p/Dollar_Value.htm
Investopedia. (2013). Exchange Rate. Retrieved June 18, 2013, from Investopedia: http://www.investopedia.com/terms/e/exchangerate.asp
Investowords. (2013). Strong Dollar. Retrieved June 17, 2013, from InvestoWords: http://www.investorwords.com/4783/strong_dollar.html
