Currency Exchange 101 and Uncle Ben

We all hear that the US Dollar is either strong or weak, and this has an impact on foreign trade, currencies, and profits.  I'll be very honest - this is a topic I have always struggled with....the weaker v. stronger US Dollar versus different currencies, blah blah blah.  Considering Mrs. Jackson and I have a forthcoming trip abroad, I now have a vested interest in developing an understanding (although the impact is minimal, as our travel plans are already established and currencies have been paid for 6 months now, so present changes yield no effect).  To develop my own understanding, I decided the best way to demonstrate this is by modeling how it works in Excel.  In the models, we will examine the impact of currencies, both weak and strong, versus a relative currency.

In the first example, we use the Chevy Spark as the baseline unit of measure, in terms of relative value (i.e. what it costs to purchase).  For this example, we will compare the relative purchasing power versus the Japanese Yen.  First, one must establish baseline values of the currencies against one another, as this will measure changes and their relative impact.  Second, there must be a unit of value that the currency will be measured against, as in the following table:

First, the baseline of relative cost is established based on exchange rates, so one can determine the cost of an object of value (this is the common in the equation) when compared to a foreign currency (exchange rate is variable).   When the demand for the US Dollar is weaker, you will be given fewer Japanese Yen in exchange, thus resulting in the export vehicle requiring fewer Yen to purchase.  Conversely, when demand for the US Dollar is greater, the same vehicle will cost more Yen.  Therefore, it can be safely concluded that a weaker US Dollar makes exports more favorable.

Now, let's refer to the import example.....

In this example, the constant (Camry) is priced in Yen, and translated to US Dollars.  When the dollar is weaker, the relative cost of a Camry in US Dollars goes up roughly 7%.  Conversely, a stronger US Dollar results in a relative decrease of cost in the same good.

So how does Ben Bernanke (aka Uncle Ben) figure into all of this?  Simple....he prints US Dollars, and under Quantitative Easing, he has printed LOTS of them.  As you know from supply and demand 101, the more of a specific item of value is in the market, the less it tends to be worth in relative means, making the US Dollar weaker.  As a result of this, it can reasonably be deduced that imports to the US will become less favorable, and exports from the US will become more affordable.  As we know, many developing nations have labor costs which are substantially less than those in the United States, this may help contribute to a competitive advantage in trading.....until a nation such as China files a complaint with the WTO for the US Fed actively manipulating currency.  In the meantime, say thanks to tourists who vacation in the US, as a result of their currency having greater buying power than it may have in the past.

Make sense now?