–Hey Taylor – I read somewhere that the US dollar was on the rise, which sounds like a good thing. However, the more I think about it, the more I have no clue what that means. Is the dollar getting stronger? And, if so, does that matter to me?

–Hey Kevin – The “strength” of our money is a funny conversation topic. It feels very real and important, and yet it’s hard to assess how strong the dollar is in terms of everyday life. To answer your question, the dollar is doing comparatively better than in recent years. This is, of course, good news, and I’ll try to explain a little bit about what it means.

  1. Our dollar versus others. When we talk about the power of the American dollar versus other monies, the simplest example is the exchange rate—how many Euros can a US dollar buy? When you fill your gas tank on the way to work, the exchange rate doesn’t really matter. If you were traveling abroad and converting your currency, the strength of our dollar would matter greatly. Our comparative strength also matters because it’s indicative of how the overall economy is doing. The fact that the US dollar index shows our currency outpacing most of the competition means that the American economy is performing as well or better than a lot of other big nations.
  2. What it means at home. Obviously, the currency conversion rate doesn’t matter if you’re not going anywhere. If you want to know how a strong dollar impacts the average American, you have to get a little more conceptual. A strong dollar is a sign the economy is doing well, which may or may not be apparent in your day-to-day life. Since inflation is still problematic, it’s hard for some people to notice the relative strength of our money in a global context. You have to trust that imports are a little more affordable and, in theory, the money saved bringing products into the US should save consumers money in the long run.
  3. Reasons for improved strength. If you feel like there’s no rhyme or reason for how money is valued, you’re not alone. After all, it’s not like you walk into the store and buy an imported good for a fraction of what you’d normally pay just because someone says, “The dollar is strong.” Understanding the outside factors can help it make a little more sense.

Again, the strength of the economy means Americans are spending lots of money. The purchasing power of our dollar is one of the things that makes it relatively “strong.” Another major factor is the unrest abroad that hits other countries’ economies harder than it does ours. For example, conflict in the Middle East affects gas and energy prices in Europe and Japan more directly than it does in the United States.

I hope this is helpful, Kevin. The strength of the dollar is on the rise, but whether or not you feel that in your wallet depends on where you are and what you do. In any event, a strengthening dollar certainly isn’t a bad thing. Thanks for the question!

 

TAYLOR J KOVAR

 

CHIEF EXECUTIVE OFFICER

CERTIFIED FINANCIAL PLANNER™