Why is a strong US dollar bad? Here's how it can hurt your bank account.

One dollar bills have been dropped into a tip jar at a car wash in Brooklyn, New York, on Oct. 24, 2016.
Source: Mark Lennihan/AP
One dollar bills have been dropped into a tip jar at a car wash in Brooklyn, New York, on Oct. 24, 2016.
Source: Mark Lennihan/AP

One of the great debates among economists is just how strong the United States dollar "should" be. 

First some quick background: Generally, "a strong dollar" refers to the value of United States currency relative to other currencies. In other words, it's how many pounds or pesos or euros you can get for a buck at the exchange.

Now, the prices of all these currencies are always moving up and down based on supply and demand: Theoretically, if the United States printed more dollars and the economy didn't grow, then the value of the dollars would go down.

The easiest way to understand the upsides of a strong dollar?

Think about how far your money goes when you're on vacation in another country: When your currency is strong, journeying abroad is a lot more fun, because buying goods and services in other countries is a whole lot cheaper.

"If you're traveling, it's a great opportunity to make your money stretch further," certified financial planner Michael Kay told Mic in a previous story.

That's pretty obvious.

But there is a catch, because a strong U.S. currency can also hurt American businesses — and thus the workers that rely on those companies for work.

One of the main drawbacks of the strong dollar is that American companies end up selling less stuff overseas, which hurts their bottom line.
Source: Greg Baker/AP

If the dollar gets too strong, then the products exported by U.S. companies can become too expensive and unaffordable for people in other countries.

In a globalized economy — where lots of businesses rely on selling to consumers abroad — lower demand overseas can lead to fewer jobs at home.

After all, out of every $5 U.S. companies earn from stuff they make, more than $2 comes from foreign buyers.

That is why some argue that an excessively strong dollar can be a major threat to both domestic and global economies, because high-value U.S. currency can be particularly hard on emerging markets like India — the "the main source of dynamism," in a the global economy, as the American Enterprise Institute's Desmond Lachman puts it.

In other words, proponents of keeping the dollar from getting too strong  argue that if fewer Indians or South Americans can come up with the dollars to buy American-made medical equipment, cars and soybeans, it'll start to hurt people in the U.S. who work for those kinds of companies. 

Then there's your retirement portfolio to think about.

Even if you don't work for a multinational company, a lot of those blue chip American businesses are likely to be in your 401(k) or IRA — think Coca Cola or McDonalds — and they rely heavily on selling their products overseas. 

An overly strong dollar could hurt their bottom line — and thus yours.

The fact of the matter is that a strong dollar is a bit of a mixed bag; it comes with upsides and downsides.

That's one of the reasons why the Federal Reserve exists — to make the necessary tweaks to interest rates so that the value of currency is at the optimum level for American workers and consumers alike.

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James Dennin

James is a staff writer covering money and millennials. Send your tips and your money problems to jdennin@mic.com.

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