How does the price of the dollar affect the economy of foreign countries?
In: Economics
If the price of the dollar (exchange rate) is low, it means that countries with a different currency can buy the same US products for less money. Example: company A sells 100 products for 100 USD to a foreign company B. Now the exchange rate falls and 100 products now cost 95 dollars. This might look not great for company A, but now company C would also like the cheaper products. Therefore a lower exchange rate makes US products more compatible with foreign products. US firms will probably have more orders and exports.
This is one reason why Germany is fairly interested in keeping the Euro low, since it “boosts” exports. (Not the best for the Euro area as a whole, since most countries import a lot)
If the exchange rate is high, that helps companies domestically as that makes foreign imports more expensive to bring into the country, and makes your products easier to export as they will be cheaper in foreign countries
If the reverse happens and the exchange rate goes low, then it has the reverse effect, foreign products become cheaper than domestic products, and it becomes harder to export your stuff to other countries.
So countries can manipulate the exchange rate to purposely boost their exports, China has been doing this for years. China exports trillions every year and imports only millions.
Some commodities are priced in dollars. Oil is a good example. international trading of it is always done in dollars.
So if I live in Europe and agree to buy oil from Saudi Arabia the price will be in USD. If I buy future oil ie: agree to buy 100,000 barrels next December the price will be a set number of dollars. If the value of the dollar goes up, I lose out, if it goes down I gain.
Many currencies are pegged to the dollar – one dollar is worth x of theirs by law or they use the US dollar as currency.
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