General Motors Company (GM), Ford Motor Company (F), Toyota Motor Corporation (ADR) (TM), AFLAC Incorporated (AFL): Is a Strong Dollar Necessarily a Good Thing?

Page 1 of 2

If you listen to political pundits, watch many speeches by politicians, or even engage in the time-honored tradition of arguing with distant family members at Thanksgiving, you probably hear a lot of talk about how one policy-maker or another is “destroying the value of the dollar” and “debauching the currency.” Comparisons to Zimbabwe and the Weimar Republic are usually thrown around.

General Motors (GM)

It seems intuitive that a strong dollar would be a good thing, but it may surprise you to learn that that isn’t necessarily true. The economics of exchange rates are very nuanced, but in some cases, a weak dollar can greatly benefit the American economy, while a strong dollar can put American businesses in a tough position.

Land of the falling yen
In December of last year, Japan elected a new prime minister, who has publicly advocated for intentionally weakening Japan’s currency. In the five years prior to his election, the yen had appreciated about 26% against the dollar, which meant that all the Japanese goods Americans import began to cost us more and more. But since his election, the yen has erased almost half those gains.

Suddenly, Japanese goods are cheaper for Americans. But the cost of goods inside Japan has remained largely the same. So, flipped around, this means Japanese manufacturers have three basic options.

1. They can produce the same product as before, at the same cost, and sell it in America at the same dollar price as before. Now that dollars are worth more yen, however, the Japanese manufacturer is able to earn a higher yen-based profit, without doing anything differently.

2. They can produce the same product as before, at the same cost, and sell it in America at a lower dollar price, using the higher exchange rate to keep profit margins the same as before.

3. The third option is create a better product that costs more to make, and sell it in America at the same price as before, again using the higher exchange rate to keep profit margins the same.

The latter two options allow the manufacturer to take market share from American competitors, either by waging a price war, or by offering costly extra features — either way challenges competitors to crush their profit margins to keep up.

The winners and the losers
As noted in a recent Businessweek article, the third option is what Toyota Motor Corporation (ADR) (NYSE:TM) is likely to do. This option is the subtlest of the three, as it allows the company to compete on quality instead of just price, making American rivals like General Motors Company (NYSE:GM) and Ford Motor Company (NYSE:F) look worse by comparison. According to Businessweek, Detroit automakers estimate that Toyota gains a $5,700 per-car advantage purely from the higher exchange rate.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!