Understanding the Valuation of the US Dollar: strong vs weak, and why does it matter?

By Bryan Jepson, MD, CFP®

There are a few economic concepts that consistently require me to sit down with a pen and paper to sketch things out—and the value of the U.S. dollar is one of them. Its impact on inflation, trade, and policy can be tricky to wrap your head around. Since it's been in the news lately, I figured now is a good time for a refresher—not just for myself, but for anyone else trying to make sense of what a "strong" or "weak" dollar actually means.

To the U.S. economy—particularly in its interaction with the global market—the valuation of the dollar functions like a vital sign. It’s not a standalone diagnosis, but it offers key information about the health of the system.

What Is the “Strength” of the U.S. Dollar?

The strength (or valuation) of the dollar reflects two main ideas:

Purchasing Power – what it can buy here at home
Exchange Value – how much it’s worth relative to other currencies like the euro or yen

Let’s explore both.

Purchasing Power (Domestic Value)

Purchasing power is determined mostly by inflation. If prices rise across the economy, each dollar buys less—meaning its purchasing power has declined.

For example, if your groceries cost $100 last year and now cost $110, your dollar has lost about 9% of its purchasing power.

This is why inflation is sometimes called the "hidden tax." It erodes your money silently. The Consumer Price Index (CPI) tracks this erosion and is one of the tools the Federal Reserve uses when setting interest rates. Higher inflation often leads to higher rates, which trickle down to what consumers pay for mortgages, credit cards, and business loans.

Exchange Rate (Global Value)

This refers to how much foreign currency your dollar can buy. For example:

1 USD = 0.92 Euro → stronger dollar
1 USD = 0.80 Euro → weaker dollar

If you're traveling in Europe with a strong dollar, your money stretches further. A €10 item would cost about $10.87 with a 0.92 exchange rate. With a weaker dollar (0.80), the same item would cost $12.50.

Stronger dollar = cheaper vacations and foreign goods.

But if you're a U.S. exporter selling products abroad, a strong dollar works against you. Foreign buyers will find your goods more expensive, and demand may fall. From their perspective, your product costs more because their currency buys less.

So, for U.S. manufacturers, a weaker dollar is better—it makes American goods more affordable on the global market.

Who Benefits from a Strong vs. Weak Dollar?

Strong Dollar: Pros and Cons

A strong U.S. dollar means that the dollar has more buying power relative to other currencies. This has both upsides and downsides, depending on who you are and what your economic interests are.

Pros:

U.S. consumers benefit. A strong dollar makes foreign goods—such as electronics, cars, and pharmaceuticals—cheaper. It also lowers the cost of imported raw materials, which can help keep prices down on domestically produced items.
International travel is more affordable. When the dollar is strong, Americans can stretch their money further overseas, making vacations and foreign education or medical care less expensive.

Cons:

U.S. exporters face headwinds. When the dollar is strong, U.S. goods become more expensive for foreign buyers. This can lead to reduced demand for American-made products abroad, hurting domestic manufacturers and potentially leading to slower economic growth in export-heavy industries.
Trade deficits tend to widen. A strong dollar encourages more importing and less exporting. Over time, this can contribute to a growing trade imbalance—where the U.S. is buying more from the world than it is selling—which has long-term implications for jobs, manufacturing, and economic leverage.

Weak Dollar: Pros and Cons

A weak dollar means that each U.S. dollar buys less foreign currency. While this might sound negative at first, it actually provides advantages in certain areas of the economy, especially for domestic producers and exporters.

Pros:

U.S. exports become more competitive. When the dollar is weak, American goods and services are cheaper for foreign buyers. This can stimulate demand abroad, increase sales for U.S. businesses, and promote job growth in export-oriented sectors like manufacturing and agriculture.
Potential to reduce trade deficits. A weaker dollar encourages foreign buyers to import more U.S. goods while making foreign goods more expensive domestically. This shift can help narrow the trade gap over time, which is a key objective for many policymakers.

Cons:

Consumers face higher prices. A weak dollar makes imported goods more expensive, which can drive up the cost of everyday items—from electronics and vehicles to groceries and clothing—especially when those goods rely on foreign parts or production.
Inflation risk increases. Higher import costs can contribute to overall inflation. As prices rise, the Federal Reserve may be forced to raise interest rates, which can slow economic growth and increase borrowing costs across the board.

How This Ties into Trade and Policy

This brings us to current policy efforts—particularly those under the Trump administration, which has taken issue with the persistent U.S. trade deficit (we import far more than we export).

To reduce that deficit, the administration imposed tariffs (taxes on foreign goods). This increases the cost of imports, encouraging consumers to buy American alternatives. But tariffs can also trigger retaliation from other countries and disrupt international trade.

Additionally, these policies tend to weaken the dollar, making U.S. goods cheaper abroad. That sounds like a win for domestic manufacturers—but there are trade-offs.

Risks of a Weaker Dollar

Here’s where it gets tricky:

Global trust in the dollar may erode. The U.S. dollar has long been the world’s dominant reserve currency. A weaker and more volatile dollar can make investors nervous. Former Treasury Secretary Janet Yellen recently noted that foreign investors may be turning away from dollar-based assets due to concerns about U.S. economic policy.
Higher inflation at home. A weaker dollar increases the cost of imported goods, contributing to rising prices. This pressures the Federal Reserve to raise interest rates to stabilize inflation.
Paradoxically, high interest rates attract foreign investment, which strengthens the dollar—undermining the original goal of weakening it to reduce the trade deficit.

It’s a complex feedback loop. Every action has a reaction—sometimes in the opposite direction.

Bottom Line: Context Is Everything

Just like in medicine, no single number tells the full story. A strong dollar isn't automatically good or bad—it depends on your vantage point. Are you a consumer, a business owner, an investor, or a policymaker?

Understanding the value of the dollar gives you insight into:

Why imported goods may cost more
How your international investments perform
What central banks might do next with interest rates

In short, it’s a vital sign worth understanding and keeping your eye on.

Want more financial insights like this delivered straight to your inbox? Subscribe to my blog for physician-specific content on money, investing, and achieving true wealth.