Strength of U.S. Dollar in Relation to Term Paper

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Strength of U.S. Dollar in Relation to the Exchange Rate.

There is no question that most people consider a "strong dollar" to be an overall good thing. After all, it just feels good to change one's U.S. dollars for Canadian ones, for example -- it makes one feel ahead of the game before setting foot outside of the exchange building. However, as joyful as one might feel in the initial stages of shopping euphoria when abroad in a weaker currency climate, the reality of just what that strength really means is a bit more complex.

When the U.S. dollar gains strength, its value rises in comparison to other currencies. Of course, at least on some levels, and in broad terms, this results in the ability of American dollar holders to buy an increased amount of a given foreign currency -- which in turn results in a drop in overall prices from the countries trading in the weaker currencies. Further, in many cases, reduced prices on products coming from weaker currency nations can actually help to keep the rate of inflation down. (ChicagoFed, 2004).

Interestingly, however, there is a flip side to the strengthening dollar -- and that is the negative toll it takes on the ability of U.S. companies to compete in weaker markets. Although the American consumer can buy foreign goods at a cheaper price, so can other consumers from other nations. Thus, the demand for U.S. products drops, the influx of foreign visitors falls with their ability to benefit from currency exchange, and the willingness of foreign investors to invest in U.S. interests can drop due to increased U.

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S. borrowing (2004).

Although it may also seem that a strong dollar can benefit some at the expense of others (for example U.S. tourists verses a U.S. exporter or service provider), the fact is that any strong imbalance of currency can weaken the economy overall. Instead, many assert that a relatively stable "neither high nor low" dollar should be the ideal (2004).

Another interesting fact is that a strong dollar with regard to any foreign currency may not be strong "historically." This means that, although the buying power of the dollar verses the Jordanian Dinar, for example, may increase short-term, the fact that it once (perhaps many years ago) exchanged at an even better rate would render it still weak.

2. Federal Budget Deficit

The U.S. Budget Deficit is a subject of much heated debate. Indeed, in that the budget deficit has grown to such an unimaginable number (The federal budget deficit is projected to hit $368 billion in fiscal 2005 (CNN, 2005)), many Americans, ordinary and economist, view it as a black cloud of impending and inevitable doom.

As most people know, the spending of the United States government is simply not supported by its revenues. This has been the case since 1969, (2005) after which the deficit has grown exponentially (many assert due to defense spending). Interestingly, however, many….....

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