For many people, it is an accepted axiom that we should have a strong currency. Indeed, many people feel that a strong currency is indicative of a strong country and economy. In some ways this is true. However, in times of recession, a weak currency becomes desirable. Indeed, dollar weakness is desirable right now as a way to boost the economy. Kathy Lien explains in FX360 the importance of dollar weakness right now in forex trading:
One of the primary reasons why a weaker
dollar will help the US economy is because it boosts foreign demand while
keeping US consumer demand domestic. A weaker dollar increases the
competitiveness of US goods, benefiting the sales of US corporations and
manufacturing activity. Hopefully
this will reduce the trade deficit, translate into more jobs and stronger consumer
spending. A weaker dollar also
helps the U.S. tourism industry and merger and acquisitions.
With U.S. assets presenting a great deal to foreign investors, it is possible that we attract more investors and capital, helping the economy overall. As a result, it is no real surprise that the government has been largely silent on the policy of dollar strength, preferring instead to let dollar weakness carry on.
Drawbacks to dollar weakness in forex trading
Of course, there are always disadvantages to counter advantages. And this is true of dollar weakness. The main drawback to allowing a weak dollar is inflation. Commodities often move higher on dollar weakness, and this causes inflation. In order to combat inflation, monetary policy may need to be tightened. This would actually hinder efforts to stimulate the economy.
On the other hand, though, inflation can be a sign of economic growth. But, unless we get out of the recession, any inflation will only cause greater problems, making increased consumer spending difficult. Inflation that comes without economic growth is called stagflation, and it is one of the most undesirable economic conditions known.
In the end, weak currencies are desirable in times like these. The fact that the U.S. dollar is strengthening again on safe haven demand (due to uncertainty stemming from the North Korean nuclear test) is not something that monetary policy makers in the U.S. are ready to see yet.
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