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. Last Updated: 07/27/2016

The Advantages and Disadvantages of a Sagging Dollar

NEW YORK -- The dollar's current weakness isn't really bad news -- for now. If it keeps falling, that could cause big trouble.

A sagging dollar can provide a nice jolt to the sluggish U.S. economy and boost profits of companies doing business abroad. That's more important than whether it makes a week's vacation in France most costly, which it does.

But a continued, sharp decline in the currency could cause havoc in financial markets and the economy because it could easily curb foreigners' interest in dollar-denominated investments.

So while there may be good reason to cheer the dollar's weakness, that could easily turn to jeers if its drop gets too severe.

"The weak dollar will give a more immediate lift to the economy, but we have to consider what is to come after that," said David Resler, managing director and chief economist at Nomura Securities.

The dollar has been falling for more than a year, losing about 27 percent of its value against the euro, the currency that represents 12 European nations, and about 9 percent versus the Japanese yen.

What a change that is from just a few years back, when the seemingly unstoppable dollar was considered the world's favored currency thanks to the booming U.S. economy and stock market.

In recent months, investors have mostly focused on the economic benefits of a weak dollar.

They like that it makes U.S. goods less expensive abroad, which can boost demand for American products and services because they may be cheaper than what is manufactured in local foreign markets.

And it raises prices for imports to the United States. That gives U.S. manufacturers some pricing power because they don't have to discount in order to compete. It also makes harmful deflation less likely.

It can help corporate profits, too. U.S. companies that do business abroad eventually have to convert their money back to dollars when calculating their earnings. So when foreign currencies are strong, profits from abroad count for more than that otherwise would.

We have already seen some benefit from favorable currency conversions in first-quarter earnings reports, with companies like Eastman Kodak and Sara Lee saying the weak dollar helped boost their profits.

"A weak dollar makes U.S. products more competitive on a global basis. That's a good thing," said Richard Nash, chief market strategist at Victory Capital Management. "The bad part is when the drop is severe and there is no end in sight."