In a weak economy, a weak dollar is better

Q: What's better for the U.S. consumer?

A: There are several ways a stronger dollar can benefit regular folks.

First, the foreign goods we buy — like cars or handbags — become less expensive. Those who invest abroad, even through mutual funds, can get better values on assets. It also makes it cheaper for Americans to travel abroad, and it can also boost consumer confidence, if workers feel their paychecks are stretching further.

Of course, all those benefits become moot if you lose your job because your multinational employer — struggling to compete overseas because of a strong dollar — has to resort to layoffs.

Q: There have been recent stretches when the dollar turned the other way and weakened. Why did this happen?

A: The Fed has cut its target interest rate to close to zero and it's vowed to take further steps to keep rates low. That sends a signal to investors that the U.S. economy remains in dire straits, and it gives investors less of an incentive to hold interest-bearing investments denominated in dollars. Reduced demand for such investments can push the value of the dollar downward.

Key short-term interest rates in the U.S. are among the lowest in the world's industrial nations — on par with Japan, which has fought for years to keep its rate low.

Q: What should we expect in the near future?

A: There are many variables that make predicting currency strength a near-impossible task, but some analysts and traders suggest the stage is set for a return to weakness against other major currencies, especially if other industrialized nations are less aggressive in cutting interest rates. Also, if the Fed continues to pump dollars into the economy, as it's promised to do, the increased supply of the currency could push the value of the dollar further downward.

Others, however, think the U.S. could be ahead of the curve in cutting rates and employing other recession-fighting initiatives, like the recent plan to aid U.S. automakers. If global economies continue to sour, it could show up in stronger demand for the dollar, which could strengthen it.

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