- Is It Smart to Invest in International Stocks to Hedge Against the U.S. Dollar?
- How Does a Strong Dollar Affect International Mutual Funds?
- Does Property Tax and Mortgage Interest Drop Your AGI Dollar for Dollar?
- Do Stocks Rise When the Dollar Falls?
- Does a US Citizen Still Pay US Taxes When He Retires to a Foreign Country?
- The Impact of the Dollar on Stock Prices
The U.S. dollar doesn't have a consistent value in relation to the world's other currencies -- euros, Japanese yen, British pounds, and so on. Its value rises and falls in response to economic conditions, government policies, import-export imbalances and other factors. Appreciation of the U.S. dollar means the dollar is getting more valuable when compared with other currencies -- and that can have a direct effect on your pocketbook.
Exchange rates allow you to "translate" a quantity of one currency into an equivalent amount of another currency. For example, $1 in U.S. money might provide the same buying power as 0.8 euros, in which case 1 euro would give you the same buying power as $1.25. (The math: 1/0.8 = 1.25.) Say you wanted to buy something made in France, and the manufacturer charges 500 euros for it. It would cost you 500 x $1.25, or $625 to buy it.
When the U.S. dollar appreciates, it gains value against other currencies. Say $1 goes from being the equivalent of 0.8 euros to 0.85 euros. Now 1 euro is worth a little less than $1.18. To buy that French-made 500-euro item, you now need about $588. The opposite of dollar appreciation is dollar depreciation -- the dollar losing value relative to other currencies. If $1 slides from 0.8 euros to 0.75 euros, then 1 euro will give you $1.33 worth of buying power. And that 500-euro French item now costs about $667.
As demonstrated in the example, an appreciating dollar affects consumers. Imported goods get cheaper, because you can buy them with fewer dollars. When the dollar is strong relative to other currencies, it's a good time to travel abroad, because your money will have greater buying power. An appreciating dollar has downsides, too. American-made goods become more expensive overseas, which hurts exports and can act as a drag on the economy. If you have investments in foreign markets -- for example, a mutual fund that includes foreign stocks or bonds -- your returns will be reduced when converted into dollars.
All currencies move in relation to one another. When the dollar appreciates, for example, 5 percent against the euro, that doesn't mean it also appreciates 5 percent against the yen, the pound, the Canadian dollar and so on. It may appreciate a greater or lesser amount against each specific currency -- or it may depreciate, or not change at all. A lot depends on economic connections between the countries that use the currencies. When you hear in the news that the dollar is "stronger," it generally means that it's appreciating against the other major currencies.
- Goodshoot/Goodshoot/Getty Images