A strong dollar is not all good news. Photo: Lin Mei, Flickr.
The strong dollar has been in the news a lot lately. It sure sounds like a good thing, but it's not that simple. Many people don't fully grasp what a strong dollar means, and that's a shame. You might be surprised how a strong dollar affects the average American.
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Let's first explain what a strong -- or weak -- dollar is. It refers to the currency exchange rate between the dollar and other currencies. As an example, check out how many dollars it took to equal the value of a British pound in past years:
Data: MeasuringWorth.com, Google.
In 1900, if you, an American with U.S. dollars, were charged 10 pounds for a meal in England, it would cost you about $48.70, as you'd be converting your dollars to pounds. (There would probably be currency conversion fees, too, but we'll ignore those for the sake of simplicity.) In 1980, a 10-pound meal would cost about $23.30. And as of last week, it would cost only $15.60.
The dollar rises and falls over time in relation to other currencies, as currencies do. For the past few years, it has been quite strong, historically speaking. How does that affect you as an average American? Let's see.
Interesting things happen when one currency is converted into another. Photo: epSos.de, Flickr.
How a strong dollar affects the average AmericanHere are some of the top ways that a strong dollar helps or hurts you.
Travel: Clearly, if you take your dollars abroad, you will get more pounds or rubles or pesos or euros for each of them, letting you buy more with your money than you could with a weaker dollar. Hotel costs, museum admissions, cruise tickets, meals in restaurants, train rides -- they will all essentially be cheaper with a strong dollar, and that can spur many Americans to travel.
Domestic tourism: On the other hand, a strong dollar makes traveling to America less attractive for foreigners, as they will face higher prices because of exchange rates. Thus, average Americans who work for, say, airlines, hotels, restaurants, and tourist attractions may see business slump.
Investments: The current exchange rates for U.S. dollars don't put a smile on the faces of many American companies with substantial global operations, though. That's because when they sell their products and services abroad, they collect payments in local currencies, which they then want to convert to U.S. dollars. A strong dollar means that they'll get fewer dollars -- while rivals may benefit from the exchange rate. It can also make those products and services more expensive to foreign consumers than local rivals' offerings, depressing sales. According to The New York Times in January, "More than 40% of revenue for the companies in the Standard & Poor's 500-stock index comes from abroad."
My colleague John Rosevear recently offered some examples for the auto industry, noting that despite the hedging that many companies engage in to protect against currency swings, some 70% of Ford Motor Company's revenue loss in its first quarter -- about $1.4 billion -- was due to unfavorable exchange rates. For General Motors , it was $1.8 billion, while Toyota and Honda , which sell gobs of vehicles in the U.S. and then convert those dollars to yen, recently enjoyed tailwinds of $1.9 billion and $2.4 billion, respectively, thanks to the strong dollar. Clearly, the strength of the dollar affects many companies and, thus, many stocks in which average Americans have invested. (To protect against this issue, you might be sure to have a solid exposure to companies operating mainly in the United States.)
Jobs: If big American companies are seeing their profits pressured by a strong dollar and they're finding it harder to compete with lower-priced domestic offerings, that's not great for business and can lead to a slowing of job growth or even some downsizing.
Inflation: A positive effect of a strong dollar is that it can keep inflation at bay. That's because the strong dollar lowers the prices on imported items, which puts pressure on similar domestic items to maintain lower price levels to compete better. Cheaper imported goods are a plus for average Americans.
Clearly, there are plenty of benefits we can reap from a strong dollar. But when the dollar starts weakening, as it will most likely eventually do, we can benefit from that, too.
The article How a Strong Dollar Affects the Average American originally appeared on Fool.com.
Longtime Fool specialistSelena Maranjian, whom you can follow on Twitter,owns shares of Ford. The Motley Fool recommends Ford and General Motors. The Motley Fool owns shares of Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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