Why Currency Depreciation Does Not Directly Explain Lower Borrowing Costs
Summary
The document asks how a weaker dollar could keep borrowing costs low, given that U.S. firms generally borrow in dollars. The included answer links depreciation to higher dollar revenues for exporters earning foreign currency, then argues that stronger profits and borrowing activity may support investment and economic growth. It also describes possible consequences such as increased inflation and pressure on household purchasing power when wages adjust slowly.
The explanation is incomplete and does not establish a direct link from a weaker exchange rate to lower interest rates. It does not distinguish nominal exchange-rate effects from monetary policy, inflation expectations, credit risk, or global demand for dollar assets. Its examples are simplified, and some stated borrowing mechanics are not well supported. Treat the passage as an intuitive but limited account of potential macroeconomic channels, not as a reliable causal explanation of borrowing costs.
Key ideas
- A weaker dollar can increase the dollar value of foreign-currency revenues earned by exporters.
- Higher expected revenues may affect firms’ investment and financing decisions.
- The answer proposes growth and inflation channels but does not demonstrate their effects on interest rates.
- Borrowing costs also depend on monetary policy, inflation expectations, credit risk, and broader financial conditions.
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Full text
# Why would a weaker dollar keep borrowing costs low # Why would a weaker dollar keep borrowing costs low I was reading this article and I am puzzled by this phrase: A weaker dollar has made it easier to sell U.S.-made goods overseas and kept borrowing costs low. How can a weaker dollar keep borrowing costs low? When US companies borrow cash, they usually borrow dollars, right? So what impact can the dollar have if it's high or low? ## Answer by kris123456 (score 1, accepted) https://quant.stackexchange.com/a/35381 Say, Case 1: Strong dollar. 1 USD = 1 EURO Case 2: Weakened dollar. 1.5 Dollar = 1 EURO If Microsoft sells licence for windows in Eu for say 10 Euros. In case 1, with strong dollar, Microsoft will earn 10 USD. In case 2, with weak dollar, Microsoft will make 15 USD. So profit for the company increases by depreciating the currency, but it has some adverse effects too. If some company wants to lend, it has to lend more money, because dollar is weak now. so, banks will make interest on more money. Currently the interest rates in US are around 1%. So, by weakening dollar, companies have to borrow more money and could earn more dollars in return (profits). Borrowing cheap and making more money/profits. Because dollar is weak. If dollar is strong, they need to borrow less and make less profits. The problem is, there will be more outflow from banks which are currently sitting on huge pile of cash. As companies are lending more and taking risk, in case of defaults, guess what happens. If everything goes fine, money circulation improves, and this improves GDP too. So, more tax income to Government. As more cash is circulating in markets, there will be more inflation. As currency weakens, people income wouldn't increase immediately. Most of retail employees are on minimum wages. guess what happens to them, who currently aren't able to make ends meet. with inflation and minimal or no wage increases. scary.
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