While most people view a weak dollar as a bad thing, the reality on the ground is that there are benefits of a weak dollar to U.S. firms – and especially to multinationals. In fact, these benefits are so profound that they eventually trickle down to the shareholders, government, economy, and ordinary Americans. Of course, there are shortcomings to a weak dollar, but we will look at the subtle but powerful benefits of a weak dollar. Here they are.
Popularizing “Made in America”
American products are renowned for their good quality, but they are also expensive compared to foreign products. However, with a weak dollar, American products suddenly become cheaper and more attractive to both domestic and foreign customers. This has two effects:
- New markets emerge
- Industries are revived
To start with, more people will be willing to buy American products, resulting in new markets. U.S. firms will hence make more profits by increasing production, and profits from overseas will become inflated as will be explained later in the article.
On industries, the reason why many firms outsource their production services overseas is that labor and resources are cheaper there. A weak dollar would reverse this. A weaker dollar will make imports expensive and domestic consumers will have to look inward to fulfill their needs. To cater to this demand, U.S. firms will increase their domestic production operations. They will sell more to local customers, hence increasing their profit margins.
In addition to revenue, this also comes with benefits for the U.S. citizens who will be employed in these new industries, and consequently to the overall national economy.
Profits and Competitiveness
U.S. multinationals have the most to gain from a weak dollar when it comes to profit-making and beating the competition. Consider a U.S. firm with operations in Europe. When the dollar falls, the Euro will become more valuable to U.S. investors as it is now stronger.
When the firm processes its returns back home in the form of Euros, it will get more dollars than it initially would, hence boosting its profits and giving it a competitive edge over foreign competitors.
A weak dollar is most beneficial for U.S. multinationals when they are competing with other companies at home. These firms adopt and learn some strategies that would mislead the competition and throw them off guard. Taking two multinational competitors, one from the U.S. and another from Europe, the U.S. firm will not only enjoy a boost in its overseas profits but also lower operating costs back at home. This is ultimately a big win if the company shifts its manufacturing and production operations back home. The competitors, on the other hand, will struggle with higher production costs while still dealing with more affordable American products and a picky customer base. Eventually, the U.S. firm will come out on top or, at the very least, increase its customer base at the expense of competitors.
It Is More Than Just Corporate Benefits
A weak dollar benefits more than just American firms and multinationals. Looking at statistics, the dollar has fallen in value relative to other major currencies by as much as 40% since 2002. This has created the illusion that the dollar might be losing its prestige as a store of wealth. The strong economy and a stable political environment have however compensated for any losses in value the dollar might have had. Economically, the low interest rates that come with a decreasing value are beneficial for keeping the economy healthy.
Company shareholders and stock market dealers also stand to benefit from a weak dollar. The firms they have invested in accrue more profits, thereby boosting the company’s attractiveness to more investors and appreciating its value. The firms thus boost theire capital, and the increased gains eventually trickle down to shareholders in the form of dividends.
The government also benefits from a weak currency. Multinationals contribute to a big chunk of the taxes collected by IRS, and this lump increases in size when their sales and profits go up. When the currency is weak, the government gets the much-needed revenue and is thus able to provide services for its citizens while also getting enough to spend on economic capital.
Conclusion
A weak dollar has its benefits as well as shortcomings. While a total weakening of the currency would be disastrous, a little decrease in the dollar value would benefit U.S. firms. A weak dollar would result in an increased competitive edge, and the benefits of that would go far beyond the firms.
