How Does a Weak Dollar Affect the Personal Finance?

The USD has been weaker during the recent three months. This shows the USD Index that measures the performance of the US Dollar against a basket of currencies: EUR, JPY, GBP, CAD, CHF and SEK. It can be observed that a weakening Dollar correlates with increasing prices of commodities, e.g. gold, silver and oil. What does a weaker Dollar mean for the personal finances?

A weaker Dollar causes higher prices of imported goods in the United States. The US citizens need to pay more if they consume imported goods. They feel it obviously if they go to the petrol station. This affects the beginning driving season in the United States.

All the imported industry products that are traded and denominated in USD get cheaper for people who live in areas of currencies that tend to be stronger against the Dollar. A weaker Dollar dampens the effect of higher commodity prices in USD for the people who pay in Euros or other currencies that tend stronger against the Dollar.

There are other important effects of a weaker Dollar. Creditors who hold bonds in USD see their bonds and the yield on bonds devaluated. It will be unattractive to invest in USD bonds. This can affect the US government that needs to emit US treasury bonds on a gigantic scale in order to finance the multi billion recovery programs for the US economy.

A weaker Dollar worries the big exporter nations that are great creditors of the United States. China is the biggest creditor of the United States. Germany, the oil rich Gulf States and Switzerland are further big creditors. Their banks of issue, the counterparts to the Fed, keep enormous amounts in US treasuries and other US bonds. Their reserves are at risk if the weakening of the Dollar sustains. China is mostly concerned because the US debts in China have accumulated to about 200 billion USD.

What is a recommendable strategy in these days? Only a small part of the investments should be kept in US bonds, if at all. It is better to own gold than Dollars.

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Liliane Waldner