When the dollar's value goes up, it can buy more imports. For example, if the dollar doubles in value while the British pound stays the same, a dollar can buy twice as many British goods. If the dollar goes down, foreign goods become more expensive. It works the other way around with exports – if the dollar doubles in value, it takes twice as many euros, pounds or yen to buy the same amount of U.S. goods.
Businesses, here and abroad, usually react to changes in the dollar's buying power. If the dollar depreciates in value, making U.S. goods cheaper overseas, American exports usually rise. The volume of imports may drop, as imported goods become more expensive. Some people will switch to American-made goods rather than pay the higher import price. The growth in American exports may increase overall American manufacturing and production to meet the market.
If the dollar becomes stronger, the process works in reverse. It's tougher to export if the value goes up. Imports become more desirable and can compete better with American-made goods.
Other economic factors can throw off this neat, tidy relationship. Importers or exporters may eat some of the price increase rather than pass it along to customers. Increased demand for a particular import may make Americans swallow the price hike and keep buying the same amounts. It's hard for economists to tie fluctuations in imports and exports to specific causes, as all the factors interact.
The dollar's rise and fall affects businesses, manufacturers and farmers in multiple ways.
- If imported raw materials go up in price, it increases the cost of the finished product.
- If imported materials go down in price, manufacturers can keep the price the same and make a bigger profit. They can also lower the price and increase sales volume.
- If U.S. exports become more expensive, exporters make more profits, assuming they can sell the same amount of goods.
- Businesses may change their strategy. If dollar fluctuations make it more profitable to sell in Europe or Canada, a manufacturer may increase exports over domestic marketing.
It's easy to think that if you just adjust prices when there's a major currency shift, that will keep your business on an even keel. Instead, think of how prices will affect your relationships with your customers. If import prices rise and you keep your prices constant, will that create customer loyalty? If you have to raise prices, can you compensate by giving improved service? If, say, the dollar's rise against the euro makes it hard to sell in Europe, can you compensate by opening new markets elsewhere? A strategy that doesn't focus solely on price may be a winner in the long run.