How can Trump strengthen the economy? With a weak dollar
By: Parker Nolan
Tags: Economics, Currency Exchange, US Politics, Us Dollar, Donald Trump

Sounds weird, right? Read on to find out why Trump’s biggest obstacle is a strong dollar.

*Quick note: this is not a politically-charged piece, merely a simple guide to a confusing economic principle.*

President-elect Trump’s entire campaign was spent promoting the idea that the American economy sucks. That our country has been pummeled by foreign powers like China, which have stolen away manufacturing jobs and precious dollars in their quest for world domination. So you would think that the recent strengthening of the dollar would be good, right?

Actually, it’s just the opposite.

I’m not saying that a strong dollar is bad for the economy necessarily. In truth, it depends on what you consider a strong economy. If your idea of a strong economy includes high demand for U.S goods, more manufacturing jobs, and lower interest rates, you will prefer a weaker dollar, and vice versa.

Trump’s idea of a stronger economy certainly is to increase the number of manufacturing jobs in the United States. He has said this during debates, in rallies, and in tweets. Donald Trump also wants to reduce the trade deficit that exists between the U.S. and Mexico. With these goals in mind, a strong dollar actually poses a problem.

Definition of a strong dollar

To avoid any confusion, I’ll define the term ‘strong dollar’. The dollar is considered strong when you can buy more of a foreign currency with it than you could before. For example, the U.S. Dollar (USD) to Canadian Dollar (CAD)exchange rate is currently $1/$1.36. This means that you can exchange one United States Dollar and receive $1.36 in Canadian dollars.

There isn’t necessarily a set level at which you would consider the dollar ‘strong’, but any time when the dollar is worth more than one unit of a foreign currency, it’s safe to call it a ‘strong dollar’. It’s a relative measure, so if the dollar is worth more compared to a certain currency than it was at another time, it has gained strength. Going with the above example, the USD to CAD exchange rate was $1/$1.45 earlier this year. Compared to that time, the U.S. dollar has lost strength against the Canadian dollar because the dollar has lost 9 cents of value compared to the CAD. Still, the U.S dollar is considered strong because it is worth more than one Canadian dollar.

What’s good about a strong dollar?

Spoiler alert, most of the benefits involve foreign countries.

When I first started learning about currency exchanges, I was confused. “If the dollar is worth more, isn’t that always better?” That’s the question that hung in my head for a while.

And when you think about it, a strong dollar is pretty good for a lot of things. Things like:

Buying foreign goods.

If a British-made car like an Aston Martin is selling for £155,000 and the pound/dollar conversion rate is £1/$1.23 (the current rate), the car will cost $190,467.88. Just one year ago, the conversion rate was £1/$1.48, so that same car would cost $229,400. Going on vacation

Higher USD/foreign currency exchange rates mean that you can get a better deal on hotels, services, etc. in foreign countries. Better stock prices for foreign companies

Going along with point 1, companies based in other countries benefit from increased exports to the United States. The lower prices generate higher demand here in the U.S., and that’s good for business and stock prices.

About point 1

If you’re a car fanatic or simply curious, you might have looked up the price of the Aston Martin DB11 and found that while its price is £155,000, it is retailing for over $210,000 in the sates. This is the case with many foreign goods sold in America: their prices do not reflect current exchange rates.

This is because European car makers understand that fluctuations in currency exchange rates can negatively affect their earnings, so they set a higher price in the United States to prevent against this. The price also reflects the added shipping and handling costs involved with getting the car to the U.S.

The best way to get the most in savings when buying foreign goods is to purchase them directly from the country in which they are produced. Assuming the dollar is strong, you can exchange your dollars for the foreign currency and purchase the goods at the (usually) cheaper-than-American dollar price.

Alright, now that you’ve got a little tip (this is also why American importers pray for a strong dollar, to squeeze the most profit from their imported products), let’s get back to the bigger ramifications of a strong dollar.

What’s wrong with a strong dollar?

Like in the picture above, strength can be both good and bad. The good: the guy is freakishly muscled. The bad: all that weight could crush him at any second. Similarly, there are cons to a strong dollar.

If you were paying attention to the previous list of why a strong dollar is good for consumers, you probably know why a strong dollar is very bad for Trump’s stated goals of increasing U.S. manufacturing and sales of domestic goods.

But in case you were just skimming, here’s everything wrong with a strong dollar:

Exports decrease

American companies that rely on exporting goods can expect to see some decline in their sales. As the price to buy their products increases, the demand will fall. Also, if the company sells products that can be obtained domestically or from another country, this is the time when foreign consumers will try to find those alternatives. U.S. stock prices fall

This goes along with point 1. Investors understand the negative implications of a strong dollar, and if a business relies heavily on foreign sales, its stock price will probably suffer. Domestic demand for U.S. goods falls

As foreign imports become cheaper, consumers will purchase those instead of the domestically-made alternatives. If people can get a t-shirt that’s made in the USA for $6 or the same shirt from China for $4, which are people going to buy? (Spoiler alert: the answer is ‘the cheaper one’.) Domestic manufacturing jobs decline

As demand for goods produced in the U.S. falls, manufacturing output is slowed, which leads to layoffs at manufacturing plants.

Trump’s biggest obstacle is the strong U.S. dollar

As Trump supporters celebrate the dollar’s recent gains in strength as a signal that Trump will better the economy, the truth remains. If Trump wants to fulfill his vision of a stronger nation with more manufacturing jobs, he needs a weaker dollar.