The Effects of Imports & Exports on the Dollar

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The value of any nation’s currency is of great interest to economists, businesses and the public. Economists see a strong currency as a sign of a robust economy; businesses like a strong currency if they import and a weaker currency if they export, while the public wants a strong currency if they travel abroad. The value of a currency fluctuates based on how much of that currency is available on the market. A major factor in this is the state of a country's import and export market.

1 Imports

Businesses reliant on importing raw materials or products from abroad prefer a strong currency. This is because if $1 is worth €10, then 10 times as much can be bought. If this exchange rate continues, lots of dollars will flow into the European marketplace. If these dollars are hoarded by European companies, there will be less money flowing in the American marketplace. As there are less dollars available, the price will start to fall, as the currency is no longer a good investment. In reality this should lead to a strengthening of the Euro, which is better for U.S. companies looking to export.

2 Exports

Companies who export their products prefer the currency to be weaker. Taking the same example as above, if $10 is worth €1, then the American product will be a much better value for European consumers. This will lead to more Euros flowing into the American marketplace, which will start to weaken the Euro against the dollar.

3 Cycles

These currency fluctuations based on the import/export market lead to cycles in the value of the dollar. When it is strong, imports are good, but the resultant loss of dollars cause the currency to weaken. The weaker dollar is good for American exports, but this will eventually see the currencies fall and the dollar rise. The secret of success for economists and politicians is to ensure these cycles are not too frequent or severe in either direction.

4 Fixed Exchange Rates

If the points laid out above are true, the naturally arising question is: Why has China been able to maintain its export market for so many years? The answer is by tagging its currency, the Yuan, to the dollar at a fixed rate. This level is set well below market value, making Chinese imports a very good value for the money. The country has been able to achieve this by not freely trading the Yuan. This has drawn heavy criticism from the U.S. and Europe, because it keeps the dollar and the Euro unnaturally high and makes American products uncompetitive in the Chinese and domestic marketplace.