Federal Reserve & Interest Rates

The value of the dollar has been decreasing consistently in recent weeks. The Euro has hit an all time high against the dollar, and the Canadian currency is head to head with ours. There is also news that the Israeli shekel is gaining in value against the dollar as well.

Is there a positive side to this plummet in the value of a dollar?

When I heard about the deep dip that the dollar has been taking, I thought about imports. If our exchange rate is now worth even less than it was two months ago, wouldn’t that raise prices for us? We rely on imports from Japan, other parts of Asia and Europe for numerous manufactured goods and technology, not to mention automobiles. The weakness of the dollar in foreign exchange seems to be a negative for the economy. With the exchange rate low, it is likely that the cost of imports will inflate, which would in turn raise prices for consumers.

That side of things looks detrimental to our economic growth, but, exports are a different story. There is some speculation that we could benefit from this plummet in the dollar’s value. If the dollar has decreased in value, and foreign currency has gained value, then it would be beneficial to those countries to buy more from the United States. There is some prediction that the increase in demand for U.S. labor, goods, and services will increase. There is no way to tell for certain that this will offset the increased cost of imports, but at least the situation isn’t entirely negative.

While there is no guarantee that the demand for U.S. exports will rise to alleviate the import cost increases, it should help keep inflation from taking too sharp of an incline. The increase in export demands could at least cushion the blow or the rising Euro.

If there is a way to decrease U.S. demand for imports, we could pull through this season will some slow growth. If we can’t reduce import demand, the export demand increase may have little or no effect. Inflation has already been a major concern for the Federal Reserve particularly for the first half of this year. While there we interest rate cuts made recently, inflation remains an unresolved issue.

We will soon find out how things balance out in the Foreign Exchange market. If it doesn’t fair well, we will probably see it in inflation. Hopefully exports can neutralize the problem of the weak dollar.