Weakening dollar's impact on market

Discussion in 'Economics' started by Option Trader, Apr 16, 2007.

  1. I have contradictory messages about the impact of a weakening dollar on the economy and markets.

    On the one hand, US goods become cheaper for foreignor countries or alternatively, they can charge higher prices and reap greater profits--the dollar serves basically as a credit note which the foreign country who accepts the dollar can only cash in by using them ultimately by buying American goods or holding up the American real estate market. Worse case scenario, if some foreign countries stop accepting the American dollars that will stabilize the trade deficit--i.e. there becomes a theoretical limit.

    On the other hand, everyone seems to be righfully concerned.

    Who can explain?
  2. Is someone keeping secrets? Or just as confused as me?
  3. The first problem is that if they spend those dollars the price gets bid up for whatever they are buying.

    The second problem is what will the person that took the dollars in the exchange above do with the dollars?
  4. Higher prices will just increase corporate profitability. Also, the price will not increase to the extent it will chase away all buyers, rather to the extent the supply & demand will become balanced.

    Concerning the other point, are you referring to the American supplier?
  5. A weakening dollar may result in the markets going up. However, everybody seems to forget that even if you get more pieces of green paper back when you decide to sell, you probably won't be able to exchange them for as much "stuff".
  6. But in the end of the day, that means when the Q's are at $45, it's not the top of the range-- to the contrary, maybe the bottom?!
  7. Seen in isolation, a weaker dollar is good for future export growth, and reducing imports, thus indicating a stronger dollar and a stronger stock market. However the weak dollar in the first place is also a symptom of low export, high import and general sluggishness in the economy.

    Its like with rate cuts, they are good for the economy in isolation, but they are being cut because the economy is not performing well.
  8. john12


    i disagree. since were a consuming nation a weaker $ will cause inflation to sky as country's exporting here will demand more $'s for the same goods. its also a huge negative for all country's buying are bonds as on currency translation alone they'll lose money. plus all the americans that buy goods from abroad and travel abroad will weaken big time hurting other country's economies. isn't the weak $ what caused bonds to sky and the stock market crash of 87?
  9. Yes a weaker $ is clearly inflationary, but not all products are imported, domestic productions becomes more competitive.

    The flip side of the US as a big consuming nation argument is that if demands from the US shrinks, exporting countries can’t demand much more $ for the same goods even if the $ is getting weaker.

    It’s also easy to imagine a weak $ can cause bond yields to skyrocket if foreigners are dumping bonds as the $ starts to fall, but this is irrational logic. From a rational point of view falling bond prices and a falling $ makes bonds more attractive to foreigners as an investment in double speed, but once the ball starts rolling…

    I am too young to know much about what happened before the 87 crash.
  10. the trade deficit is being financed by dollar devaluation and foreign banks propping up the US debt (the consumer)

    the unwinding of this is rather bloody and your purchasing power is declining (in US Dollar terms)

    witness the cost of housing which requires 15% more dollars every year to afford....

    and a tank of gas costs $70

    you're being sold down the river if dollar devaluation is any kind of fix for out of control debt
    #10     Apr 16, 2007