The US dollar has recently plunged to its lowest levels since April 2018 as the combination of the federal government's multi-trillion bailout for the country's economy and the Federal Reserve's commitment to stabilize the financial markets by injecting trillions in liquidity has resulted in the continuous depreciation of the North American currency.

Now, with President-elect Joe Biden already pledging to issue another $1.9 trillion to further support those impacted by the economic crisis that the pandemic has caused, businesses should be prepared for a scenario in which the dollar remains weak throughout 2021.

If that were to be the case, what would be the short-term impact of a weaker greenback in the US economy? Is it good or bad for small businesses in the country?

In the following article, business consultant Jasdeep Singh from Connecticut takes a closer look at the immediate effects a weaker dollar can have and help business owners to understanding how it can affect their performance.

A weaker dollar is a two-sided coin

A weaker US dollar has many consequences for the US economy and small businesses and this makes it hard to list them all in a single article.

However, Dr. Singh believes that, for small business owners, there are a few of them that will be more impactful and easier to identify.

The first of these is a rise in fuel prices since the United States still depends on imported oil to cover its internal demand.

Higher fuel prices would translate into higher supply chain costs which would affect the COGS ultimately the price of any finished goods. High process could then result in lower demand from customers and decreased revenues.

Moreover, given the fact that US businesses rely heavily on goods imported from countries like China, the cost of both finished and intermediate products will most likely rise as it will take more $US to pay for the price of anything in yuansor any other currence.

Meanwhile, for businesses that receive income from customers outside the United States, a weaker dollar would result in a drop in their dollar revenues as the company will receive fewer dollars for the same amount of foreign currency.

That said, a weaker dollar also carries certain advantages for small businesses, especially to those that export their goods.

In this regard, a weaker greenback will result in cheaper export prices, which can possibly boost the demand for US goods overseas.

This would ramp up the revenues of exporting firms in the short-term, although in some cases the degree of response from the global markets is not necessarily straightforward as other countries are also competing and debasing their currencies at this point amid the pandemic.

Meanwhile, for businesses in the travel and leisure sector, passenger volumes might increase during periods when the dollar is weak because international tourists would find it cheaper to take a vacation to the United States amid the relative strength of their local currency against the greenback.

Is a weaker dollar good in the long run?

At this point, the dollar remains significantly stronger than it was during the 2007-2008 financial crisis, which means that the situation is not as alarming as it seems in the short-term.

However, it is important to note that the US economy has not yet fully responded to the trillions of dollars that were injected into the system.

In this regard, UCONN graduate Jasdeep Singh believes that the velocity of money is the one indicator to watch in the following months, as a higher velocity could start having a strong effect in the value of the North American currency.

A spike in the velocity of money, an indicator that tracks how fast money flows within the economic system, can end up resulting in higher inflation rates, which would further depress the dollar to new lows - a situation could have even more serious long-term consequences.

In this regard, Dr. Singh believes that successful economies can hardly remain so if their local currencies stay at depressed levels for a long period because the constant deterioration of individuals' and businesses' buying power would overshadow any potential gains. The answer is for everyone to remain vigilant about the velocity of money, inflation rates, and overall buying power of the dollar and make sure policy makers hear the voice of small businesses.