What happens if the value of the dollar goes down

A weaker dollar means that American goods and services become cheaper abroad, which acts as a stimulus for further economic growth there. However, the danger is that investors could decide at once that the further big dollar falls are inevitable: the resulting rush to sell would turn a steady decline into an all-out crash, destabilising the global economy and making interest-rate rises and higher inflation more likely.

That means British tourists shopping in New York are set for a very merry Christmas, whereas Americans who live in Europe but get dollar salaries from their US employers are feeling much less cheerful. For essentially the same reason, American exporters gain from a weaker dollar because their goods cost foreign customers less to buy, so they buy more. Similarly, firms with subsidiaries in countries with a stronger currency will benefit when their profits are converted back into dollars.

All stand to benefit from strong foreign earnings. But remember: UK investors considering buying dollar-denominated shares will inevitably be exposed to the weakening dollar themselves. If the dollar continues to fall, the shares could end up worth less in sterling terms when they come to sell, even if the dollar stock price has risen. That means this may not be the best way for non-US investors to approach the falling dollar.

Instead, one short-term way to approach the problem may be to consider how the big global investing institutions might react to the falling dollar, says Ben Wright, writing in The Business.

According to State Street Global Markets, equity investors are already starting to pull money out of the US and pour it into equity markets in the eurozone instead with a view to earning money in euros not dollars.

And their targets? Companies operating in the eurozone with no exposure to the dollar. That means we could see upticks in the share prices of firms such as the large French banks - BNP Paribas, Socit Gnrale and Crdit Agricole - which earn most of their revenues domestically. Banks in the Nordic region, Italy and Germany will also benefit. The same is true of the European utilities and telecoms sectors, which tend only to have domestic revenues.

Merrill Lynch analyst David Bowers has also screened for the companies that usually do best when the euro strengthens against the dollar. European food, utilities and real-estate companies dominate, with Belgium's supermarket operator Colruyt and electricity supplier Electrabel topping the list and brewer Heineken further down.

These are some of Europe's "most defensive stock names". The companies that will gain the most will be those that spend dollars but earn their money in non-dollar currencies. That means that sensible investors will continue to seek out high-yield plays that pay in sterling or in euros. Act like a multi-national corporation - buy high-yielding investments in the UK or Europe while spending as much as possible in America.

Your income will go up as your expenses go down. Already, American-made products, real estate and vacations are much cheaper than they were a year ago. In the UK, that means looking to the UK and to the utilities and financial sectors in particular. Those sterling yields are going to look particularly good when you are out and about shopping in New York.

But against what? Europe's money supply is actually increasing faster than America's. Therefore, if your portfolio has benefited from the dollar's slide for a few months, it might be time to break out the pom-poms and cheer for the greenback to rise. Securities and Exchange Commission. Federal Reserve. Portfolio Management. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content.

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Shareholders Benefit. Exporters and the Dollar. Pitfalls of a Weak Dollar. The Bottom Line. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

Crowds often bunch up in asset classes around tops. This is why betting against the crowd as a contrarian often pays off. The big bullish bet on the dollar should trouble dollar bulls. Many analysts simplistically think interest-rate differentials alone explain currency moves, as money supposedly sloshes around the world chasing the best headline interest rates. But that is wrong.

Money chases real interest rates, so you have to factor in inflation. It looks like this dynamic should start playing out with the dollar soon. This trend could hurt the dollar, sooner or later.

Economists calculate embedded inflation expectations by subtracting the yield on year TIPS from the yield on normal year bonds. The difference increases as inflation expectations pick up. During the past several months two big geopolitical issues have haunted investors: Brexit and U. These uncertainties have upped the bid for the dollar, says Paulsen. A Brexit resolution would boost the British pound and the euro against the dollar. A resolution of the U. Meanwhile, China and Europe are increasing economic stimulus to boost growth.

If this works, it would draw investments abroad from the U. This would also weaken the dollar. Since commodities tend to go up in price when the dollar goes down, a weaker dollar helps emerging market EM economies, which are often commodity-based. That EM economic strength would weaken the dollar more because it draws investments out of the U.