Published on 10/30/02

U.S. dollar and you: It's all relative

By Brad Haire
University of Georgia

You may have heard that the U.S. dollar is either weak or strong. But what does this mean, really?

"It's all relative," said Don Shurley, an agricultural economist with the University of Georgia College of Agricultural and Environmental Sciences.

The Exchange

Being weaker or stronger is about how much of a country's currency you can buy using another country's currency at any time, relative to what you could buy at a previous time.

Take the U.S. dollar, for example. How many Japanese yens or Pakistani rupees can you get for a single U.S. dollar? On Oct. 28, you could've gotten about 59 Pakistani rupees or 123 yens for 1 U.S. dollar.

This is called the exchange rate. And it changes all the time, 24 hours a day.

How are exchange rates decided? The short answer, Shurley said, is good old supply and demand.

Piece of the Action

Say the U.S. economy is strong and the return on investment looks good in the United States. In this scenario, foreign investors want a piece of the action. But they have to have U.S. dollars to invest or to do business here.

These investors might pay more, using their currency, for the U.S. dollars they need to make the investments. They then take their country's currency and convert it into U.S. dollars.

"When they put their money into U.S. dollars, it drives the dollar value up relative to their country's currency," Shurley said. It works both ways. U.S. investors investing in other countries affect the value of those countries' currencies compared to the U.S. dollar.

Strong Dollar

The U.S. dollar has been said to be strong over the past few years. So, what's better? A strong or weak U.S. dollar?

A strong U.S. dollar can buy more of another country's currency and products in the United States. A U.S. citizen can buy more in another country on vacation.

But, remember. It's relative.

The strong U.S. dollar also makes it harder for other countries' citizens to vacation in the United States and to buy U.S. products in their markets. This can hurt parts of the U.S. economy.

Weak Prices

For example, the strong U.S. dollar is one reason cotton prices have been so low for U.S. farmers in recent years. It has also hurt the nation's textile industry, which turns cotton into shirts, jeans and other clothes.

The strong U.S. dollar, according to the National Cotton Council, has made it hard for U.S.-made textile items to compete in foreign markets. And it has allowed cheaper foreign-made textiles to dominate the U.S. market.

So, the American textile industry has shrunk over the past few years. It can no longer handle the amount of cotton it used to, Shurley said.

In 1997, U.S. textile firms could economically make enough clothes and cotton items to use about 11 million bales of cotton. In 1999, that dropped to 10 million. This year, they will need only about 7.5 million.

As a result, U.S. cotton farmers have to sell their cotton abroad. This year, U.S. farmers will grow about 18 million bales of cotton. (A bale is about 480 pounds of lint.) Of this, about 11 million will have to be exported, he said.

But to compete on the world market, U.S. exporters have to drop their prices to compete, sometimes below what it cost to grow the crop in the United States.

It's been reported that the dollar weakened over the summer. This could affect the U.S. economy, the world economy, cotton farmers and you. But we'll have to wait and see. It's all relative.

Brad Haire is the former news editor with the University of Georgia College of Agricultural and Environmental Sciences.