Is a Weak Dollar a Bad Thing?

Chart of the Week for April 1-7, 2005

Over the past couple of years, the U.S. dollar has experienced a significant decline in value in relation to the Euro. In November 2002, the exchange rate between the dollar and euro was almost one-for-one. However, as of the end of February 2005, the exchange rate had risen to 1.30USD per Euro. This means that the same foreign goods costing 1.00USD in 2002 now cost 1.30USD. Conversely, foreign investors who could purchase U.S. goods for 1.00 Euro in 2002, now only have to pay 0.77 Euro.

So, what does this mean to U.S. businesses? In theory, the weak dollar should be helpful for U.S. businesses in two ways. First, the weak dollar should make U.S. goods relatively cheaper to foreign consumers, and therefore more U.S. goods should be exported and sold overseas. Second, the weak dollar will make foreign goods more expensive to U.S. consumers, which should decrease imports and encourage the purchase of comparable products made in the U.S

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