U.S. Dollar’s Decline is Helping U.S. Exports and Domestic Consumption

While the weakness of the U.S. dollar gives Americans significantly less international buying power, the dollar’s decline (NYSE:UDN) against a host of different currencies might actually be one of the bright spots in the economy, as it gives other countries more buying power when purchasing American-made goods and services, thus improving U.S. exports. It also forces Americans to consume goods and services from the U.S. rather than importing from other countries.

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While some have criticized Federal Reserve Chairman Ben Bernanke’s previous stimulus plan, quantitative easing weakened the dollar, and if Bernanke signals more stimulus measures when he speaks from his annual financial conference Friday in Jackson Hole, Wyoming, the dollar could weaken further. That means American companies like Deere & Co. (NYSE:DE) and Caterpillar Inc. (NYSE:CAT) will become more competitive in foreign markets, while simultaneously making their prices more attractive in the U.S. as well. As of June, American exports were up 16% for the year as the dollar fell, now 6.3% below its valuation at the beginning of the year when compared to major foreign currencies.

As the dollar has weakened, Deere has seen its sales increase 22% to $8.37 billion, with “a favorable currency-translation effect” and high Asian demand helping the American company to record profits. Caterpillar added an extra $350 million in revenue between April and June when compared to the second quarter of 2010, and while Wal-Mart’s (NYSE:WMT) domestic sales have been down, its international unit added an extra $2.3 billion just in “currency-exchange translation benefit” during the second quarter, when total sales climbed to $30.1 billion.

Harvard University economics professor Martin Feldstein, who is also a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, notes that “One of the things about the declining dollar is that it doesn’t add to the national debt.”

But Treasury Secretary Timothy Geithner says the U.S. wants a stronger dollar (NYSE:UUP), and Feldstein agrees. While it has its positive points, a declining dollar weighs on personal incomes, as households have to pay more for imported items that have no domestic substitute. While U.S. exports have climbed 16% this year through June, so have imports, and the cost of goods shipped to the U.S. this year has risen 8.9%.