“As Dollar Heats Up Overseas, U.S. Manufacturers Feel a Chill” a New York Times article by Nelson D. Schwartz, notes that the dollars rise in the past few months coupled with the fall in the value of the euro has caused American companies to feel “the heat” on both sides of the Atlantic. Europeans can no longer afford American goods without some sort of discount, while here in America consumers are demanding lower prices. European countries have been able to use the strength of the dollar to decrease their prices on their exports to United States without reducing profits. Some American companies, such as Mr. Stevenson from the article, have to cut prices and sacrifice profits in order to keep business going strong.
The sharp rise of the dollar threatens to undercut the strong export growth of American companies, which has been seen as one of the main drivers of the economy since the recession. Janet Yellen said that the stronger dollar would have an effect on exports having “a notable drag this year on the outlook.”
Companies like McCormick & Company and Tiffany and Oracle have already seen the consequences of the stronger dollar. Even though the Euro is making a comeback it is currently worth $1.10 compared to the $1.25 of December. However, the fall of the Euro is not the only currency that has experienced a decline. The British pound, the Australian dollar, the Japanese yen, and the Brazilian real, have all fallen over the past few months.
The dollars increased strength means that unless American manufacturers adjust their prices their good cost approximately 15-20 percent more than last year. Economists do not suspect the dollar to fall anytime soon, so they expect that the euro and dollar could realistically reach parity for the first time since 2003. The dollar is continuing to surge due to the fact that the United States “remains an island of relative strength in the global economy.” This coupled with the expectation that the Fed will increase the interest rate at some point this year, even though the ECB is keeping interest rates low to stimulate the long-dormant economy.
Discuss both the shortcomings and the positive effects of the stronger American dollar. The article noted that economic benefits can be seen as cheaper imported goods, limiting threat of inflation giving the fed more time before a rate rise kicks in, and travel abroad is cheaper/more affordable for Americans. Do the costs outweigh the benefits? If it does what should be done?
4 Comments
Downward pressure on net exports is one of the consequences of an appreciating currency. As the dollar appreciates relative to the euro, American goods become more expensive to European goods and European goods become relatively cheaper to Americans. This could also have a negative effect on tourism in the United States. It becomes more expensive for Europeans to travel to America as the dollar appreciates relative to the euro. The exchange rate between the euro and the dollar has been incredibly volatile recently, so I am interested to see where the to currencies appear to settle moving forward.
It should be interesting to see the effect of the appreciating US dollar on the world economy. I saw recently that an ECB official mentioned that US economic growth was a significant driver of world GDP growth. Should be interesting to see the effect on the world economy vis a vis the US economy.
The increasing value of the dollar should also make it more difficult for foreign firms with weak dollar earnings to repay the dollar-denominated debt they took on due to the favorable exchange rates due to the Fed’s use of monetary policy and quantitative easing.
I’m not sure there’s that much cross-currency borrowing. But another angle is that import prices will be lower, and book earnings of multinationals will be lower (that can be the case even if profits are up in each and every individual market!). Meanwhile to Europeans and Japanese, petroleum prices have fallen much less, so that means there will be less benefit to them (and less demand increase that might reverse the global price slide). So a strong dollar can feed into lower commodity prices, even when those prices are denominated in dollars.
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