Why Does the Weak Dollar Matter?

The dollar continues to fall against foreign currencies. Traders get excited about this sort of thing, but does it matter to ordinary folk?
Exchange rates do matter. If you buy a car or other good made overseas, or travel abroad, a weak dollar makes things more expensive.

But if you work for a company that does business overseas, a weak dollar can improve sales by making your firm’s goods and services cheaper for foreigners. And the falling dollar boosts gains if you already have foreign investments, such as mutual funds filled with foreign stocks.

So the falling dollar is a mixed bag.

During the past six months, the dollar has fallen about 15% when measured against the U.S. Dollar Index, a basket of six currencies such as the yen, euro and British pound. On Sept. 23 it hit the lowest level for the year.

Most experts attribute this to recession-fighting efforts by the U.S. government, which is pumping money into the system, increasing the supply. At the same time, low interest rates reduce demand for investments like U.S. Treasury securities, which foreigners use to invest in dollars.

Also, currency traders worry that huge U.S. budget deficits will prolong these conditions, and that an oversupply of money will spark inflation, further undermining the dollar.

There are several ways to hedge against the effects of a falling dollar, but they’re not all useful for small investors and consumers.

Trading in the currency markets is really for the pros and very serious amateurs, as things move very fast. Most currency trading involves leverage, or betting borrowed money. That amplifies potential gains but also boosts risks.