Why would a cheap dollar relative to other nations' currencies be good or bad for U.S. trade?

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kipling2448 eNotes educator| Certified Educator

The value of the U.S. dollar, or "greenback," relative to that of other national currencies (e.g., the Japanese yen, euro, British pound) is directly related to the flow of goods and services across borders.  As a general principle, the greater a currency's value relative to that of its trade partner, the fewer goods a nation will export to that partner because its goods, being valued in terms of its own currency, are more expensive in the other country's market.  Conversely, the weaker the currency relative to that of the trade partner, the more competitive that nation's goods will be, as they will be cheaper in the trade partner's market.  When the value of the U.S. dollar rises against the value of the yen, American goods become more expensive for Japanese to purchase, making them less attractive options for those consumers.  A weaker yen makes Japanese products cheaper for Americans, precipitating a trade imbalance.  

It is because of the correlation between relative values of currencies and trade balances that some countries, most notably China, manipulate the value of their currency to ensure that their products are more affordable for American consumers.  The Chinese have long maintained a "peg" between their currency, the renminbi, and the dollar, which ensured that Chinese goods would always be cheaper than American products.  This currency peg has been a major irritant in relations between these two massive trade partners, although there has been gradual progress over the past decade in convincing the Chinese to loosen government controls on the renminbi.  

In short, a weak or cheap dollar relative to the currencies of trade partners benefits American exporters by making their products less expensive in foreign markets.

nmungazi | Student

A cheap dollar relative to other nations currencies can be good or bad for U.S. trade this draws a lot on the understanding of how foreign exchanges works.If the U.S. currency gains strength it means that more units of other currency would be needed to buy just one U.S dollar and in the other way round if the U.S. dollar becomes relative cheap it implies that few units of other currencies can buy more units of the U.S dollar.

These foreign exchanges are accompanied by some good or bad effects on trade and they extends to some of the activities of the economy.Mostly this effects are shown on balance of payment(bop).BOP is defined as a country's  record of all economic transactions between the residents of a country and the rest of the world in a particular period.

Lets start with the effects that follows the U.S dollar becoming relative cheap for other currencies.This means that the U.S exports will increase due to the fact that foreign trading partners now considers U.S products to be cheap as their foreign currency will be buying more units of the U.S dollar therefore giving them an advantage to purchase more products in a foreign land(U.S) than in their own land.This effect of more exporting advantage to U.S will in turn improve U.S. BOP as exports will outweigh imports.This will also extends to other social indicators particularly the unemployment rate will fall as more production in tells that more workforce is needed to meet the increased demand of U.S produce internationally.Also this will improve the U.S GDP as more production means an improvement to the GDP.

Secondly, as U.S  foreign trading partners import more of U.S products the balance of trade will also improve giving an improved national appeal to the U.S which will attract foreign investors to invest in a so promising nation therefore improving the Foreign Direct Investment under the Balance on direct Investment of U.S.Here I will not mention that it will improve the rate of employment but rather it will improve the government taxes from increased investment portfolios by local U.S companies which in turn means that the government can now venture into other social issue that require government funding for example providing social benefits to the under privileged and even meeting Research and Development(RD) in promoting other sectors of the economy which will also add to providing more competitive products on international markets due to improvements from RD.

Lastly a cheap U.S empowers local U.S firm to acquire more advanced technology to improve their production as they now have foreign currency from exporting in foreign markets which makes it possible for them to pay for foreign advanced technology to enhance their operations.

However there are also bad effects to  U.S trade accompanying a cheap U.S  dollar relative to other nations' currencies which include reducing the units of imports.This  is due to the fact that U.S citizens will find it difficult to purchase foreign products as more units of the U.S will be required now to buy the same unit of a foreign product therefore lowering U.S consumer sovereignty as now there can only spend on affordable produce which now proves to their locally products.

Conclusively a cheap U.S dollar is capable of attracting a couple of advantages on the bases that U.S products becomes more affordable on international market.It is also relevant that one knows that if a country is maintaining a free float exchange rate in which the forces of demand and supply of a currency gives out the exchange rate,as the U.S dollar becomes more cheaper and more foreign trade partners increase their demand for U.S. currency to purchase U.S. products,the demand of the U.S. currency shifts up therefore increasing the exchange rate of a U.S dollar making it not cheap than initially.This circle always continue in the extend that governments often intervene in attempts to stabilize the exchange rates from fluctuation.  

Why would a cheap dollar relative to other nations' currencies be good or bad for U.S. trade?