I’m an Economist: How the Value of the U.S. Dollar Affects Your Wallet
Written by
Emily Fowler
Edited by
Laura Bogart
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The value of the U.S. dollar changes every day, but many people don’t think about how it affects their wallets. A stronger or weaker dollar can have an impact on more than just exchange rates — it can influence things like job security, retirement savings and the prices of everyday goods.
GOBankingRates spoke with economists to find out more about how the value of the dollar can influence budgeting and financial planning.
What Determines the Value of the U.S. Dollar?
The value of the dollar is set by supply and demand in the foreign exchange market. When people or businesses need U.S. dollars — whether to invest in American stocks, buy U.S. products or make contracts in dollars — they exchange their own currency for dollars.
“When there is enough demand for dollars, that begins to put upward pressure on the value of the dollar and downward pressure on the currency being sold,” said Jonathan Wolff, associate professor of economics at Miami University (Ohio).
Another factor is how safe the U.S. economy looks compared to others. During times of uncertainty or global economic downturns, investors often move their money into U.S. assets like treasury bills, which are seen as stable. This increased demand can push the dollar’s value even higher.
So how does its value affect people’s finances?
Prices at the Store
A stronger dollar makes imported goods cheaper. That means lower prices on things like clothing, electronics and even groceries, helping households stretch their budgets.
Even goods made in the U.S. often rely on materials from overseas, “thus, a stronger dollar makes consumption (of most every good) less expensive for American households,” explained Wolff.
But when the dollar weakens, imports become more expensive, and some prices at the store can start to rise. A weaker dollar can also fuel inflation, making everything from food to fuel more costly.
Wages and Job Security
While a strong dollar lowers costs for consumers, it can harm American businesses that rely on exports, “which jeopardizes the economy’s overall health,” said Noah Yosif, chief economist at the American Staffing Association.
“As the price of imports falls, consumers will tend to consume more imported goods and substitute away from domestic goods,” explained Anne Villamil, professor of economics at the University of Iowa.
On the other hand, a weaker dollar makes U.S. goods cheaper overseas. This can boost sales for American businesses that sell internationally, potentially creating more jobs or raising wages.
But there’s a trade-off: Higher prices for imported goods, which can squeeze household budgets.
Investments and Retirement Savings
The value of the dollar also affects stocks, which in turn impacts people’s retirement accounts and investments. When the dollar is stronger, U.S. stocks become more expensive for foreign investors, slowing market growth. But it also helps American companies that rely on imported materials by lowering costs.
“A strong run-up in the U.S. stock market will attract international investors, and thus strengthen the dollar,” Wolff said. “Since retirement assets are intimately linked to the market, this further strengthens the financial position of U.S. households.”
“The effect on stock prices will depend on whether a firm is relatively more export oriented (negative effect) or mostly sells domestically,” said Villamil. “It also depends on whether the firm imports inputs. A strong dollar makes imported inputs cheaper, which lowers the firm’s costs (positive effect).”
Why It Matters
The strength of the U.S. dollar is a balancing act — what benefits consumers can hurt businesses, and vice versa.
“People very often forget that individuals are both consumers and producers,” said Wolff. “While a stronger dollar might lower your cost of consumption as a household, it might also slow demand for the goods and services that you produce.”
This economic push-and-pull means there’s no perfect dollar value, only trade-offs that shape financial stability in different ways.
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