A Look at the Benefits and Drawbacks of a Weak U.S. Dollar

For many people, it is an accepted axiom that we should have a strong currency. Indeed, many people feel that a strong currency is indicative of a strong country and economy. In some ways this is true. However, in times of recession, a weak currency becomes desirable. Indeed, dollar weakness is desirable right now as a way to boost the economy. Kathy Lien explains in FX360 the importance of dollar weakness right now in forex trading:

One of the primary reasons why a weaker dollar will help the US economy is because it boosts foreign demand while keeping US consumer demand domestic. A weaker dollar increases the competitiveness of US goods, benefiting the sales of US corporations and manufacturing activity. Hopefully this will reduce the trade deficit, translate into more jobs and stronger consumer spending. A weaker dollar also helps the U.S. tourism industry and merger and acquisitions. 

With U.S. assets presenting a great deal to foreign investors, it is possible that we attract more investors and capital, helping the economy overall. As a result, it is no real surprise that the government has been largely silent on the policy of dollar strength, preferring instead to let dollar weakness carry on.

Drawbacks to dollar weakness in forex trading

Of course, there are always disadvantages to counter advantages. And this is true of dollar weakness. The main drawback to allowing a weak dollar is inflation. Commodities often move higher on dollar weakness, and this causes inflation. In order to combat inflation, monetary policy may need to be tightened. This would actually hinder efforts to stimulate the economy.

On the other hand, though, inflation can be a sign of economic growth. But, unless we get out of the recession, any inflation will only cause greater problems, making increased consumer spending difficult. Inflation that comes without economic growth is called stagflation, and it is one of the most undesirable economic conditions known.

In the end, weak currencies are desirable in times like these. The fact that the U.S. dollar is strengthening again on safe haven demand (due to uncertainty stemming from the North Korean nuclear test) is not something that monetary policy makers in the U.S. are ready to see yet.

Euro Attempts 1.4000 – Again

The euro is making another run at 1.4000 against the U.S. dollar in forex trading today. This entire week so far, EUR/USD has been trying to break and hold through that critical psychological level. So far, though, no luck has been had in getting through there, and staying for any length of time. Forex traders aren't quite ready to support the euro in forex trading at 1.4000.

However, even if the euro can't quite close the deal right now, there are expectations that it will happen in the relatively near future. Kathy Lien reports in FX360 that EUR/USD at 1.4000 is only a matter of time:

This means that the traders who want to be long are already getting long, leaving fewer buyers on the sidelines. Yet, the rally in oil  prices will help the EUR/USD  and the only things that could prevent the currency pair from piercing the 1.40 level and moving higher is a more serious threat to the credit worthiness of the U.S. or another madman firing missiles.

As long as there is some optimism about economic recovery, the euro is likely to come back. However, news out of the euro zone will need to show some improvement in order truly lend support to its currency.

Candian Dollar Forex Trading Forecast

The Canadian dollar forex trading forecast is calling for improvement as oil prices rise. OPEC has decided not to cut production (it is leaving it unchanged), and is hoping for higher demand as signs of recession begin to fade from the global economy.

The loonie is benefiting in currency trading from this news of higher oil prices. The Canadian economy relies on oil as an export, and these oil price increases are good news for economic growth.

Other commodity currencies are expected to do well also as the global economy improves. Demand is expected to pick up for industry as well as consumer spending, and that will mean that commodities will be back in demand. For commodity currencies, that means higher trading on the FX market.

Brazilian Real Forex Trading Forecast

The Brazilian real is looking for some optimism in the forex trading forecast. The real is an emerging market currency, and one that relies on commodities. As a result, risk appetite is important to the real. With news that the U.S. economy is improving, general positive sentiment is returning. Commodities are rising and forex traders are starting to look for the higher yields offered by emerging market currencies.

Right now, the real has begun gaining so rapidly that the Brazilain central bank has started buying dollars. The goal is to slow the real's rise to some degree, hoping to moderate the gains in the currency.