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Impact of a Strong U.S. Dollar

By: Isabella Lopreiato

Strong is good and weak is bad. Those generalizations sound simple enough, but they complicated when involving money. Is a “strong” U.S dollar always good? No, a strong dollar sounds good for Americans, but it’s bad for U.S. businesses that distribute products overseas. A strong dollar makes company’s products more expensive and less attractive to buyers outside the U.S. couple that along with the other foreign currency issues, more specially the case of the recent news of Brexit, neither seem to be promising for the current global economy.

Isabella Lopreiato

Isabella Lopreiato

The stronger U.S. dollar has hurt exporters and top business executives believe it could harm their investment plans. In fact, two out of three big U.S. exporters, those with at least one-fourth of their total sales overseas reported the appreciation of the dollar has had a negative impact on their business growth. Furthermore, nearly one-fourth of big exporters said they have reduced their capital spending plans as a result (Bureau of Economic Analysis 1).

Not only does it impact business, but the recent strengthening of the U.S. dollar has raised concerns about its impact on GDP growth. The U.S. dollar has appreciated around 12 percent since mid-2014, rising against almost all of our trading partners, with the largest gains against Japan, Mexico, Canada, and the Europe (Matthews 1). There was far less movement against newly industrial Asian economies and hardly any change against China. Although the dollar can impact the U.S. growth through a number of different channels, it is also necessary to focus on the direct impact through the U.S. trade balance (Bureau of Economic Analysis 1). In a recent analysis by the Federal Reverse shows that a 10 percent appreciation in one quarter cuts 0.5 percent off GDP growth over one year and an additional 0.2 percent in the following year if the strength of the dollar continues to persists (Federal Reserve 1).

Of course other nations are not without currency issues, for instance in the recent wake of the Brexit decision, the decision is impacting both United Kingdom and Europe’s economics.  As a result of the United Kingdom breaking away from the European Union, the Euro is projected to weaken and remain weak as part of the aftermath with a forecast falling between $1.05 to $1.08. The United Kingdom’s estimated losses could range between 1.5 and 9.5% of the nation’s GDP. The hit to Britain’s GDP could have continuing effects, causing spillovers to regional and global markets (Time 1).  Businesses that import products and services will now find that they will need to pay more for exactly the same goods they were previously buying. Brexit also seems to pressure inflation to rise. And if inflation goes above the target of 2%, then an increase in interest rates could occur. However, on the other hand it could provide a boost for exports as it would make British goods cheaper for customers in the US and Europe (Hunt 1). Actually, for American travelers to the U.K is that U.S. dollars are worth a lot more after the voting, in fact currently 1 GBP equals approximately 1.37 dollars (Bloomberg 1). Despite that benefit, under most pressure from a short-term perspective, it difficult to see businesses wanting to hold euros, especially if another nation decides to leave as well.

Overall, strong currency boosts both a positive and negative impact on the economy. The same goes for a weak currency. Currencies that are too strong or too weak not only harm the U.S economy, but tend to impact international trade and political decisions worldwide. All while allowing individual consumers to potentially benefit from those changes. Nevertheless, any drastic change in currency has an impact on the economy at large. Ideally, currency values should maintain stability and be less vulnerable to market shock and disruption.

 

Work cited:

FRB: With Slideshow–Fischer, The Transmission of Exchange Rate Changes to Output and Inflation–November 12, 2015. Federal Reserve, n.d. Web. 09 Aug. 2016.                                                          Work Cited

 How Do the Effects of Dollar Depreciation Show up in the GDP Accounts? Bureau of Economic Analysis, Aug. 2014. Web. 09 Aug. 2016.

“Here’s How Brexit Will Affect Your Europe.” Time. Time, June 2016. Web. 09 Aug. 2016.

Hunt, Brian Wheeler Alex. “Brexit: All You Need to Know about the UK Leaving the EU.” BBC News. N.p., July 2016. Web. 09 Aug. 2016.

Matthews, Chris. “A Strong Dollar Could Derail the Fed’s Interest Rate Plans.”Fortune A Strong Dollar Could Derail the Feds Interest Rate Plans Comments. Fortune, 27 Oct. 2015. Web. 09 Aug. 2016.  

“Yellen Losing Dollar Bet as Its Rise Slows Growth, Inflation.”Bloomberg.com. Bloomberg, 2016. Web. 09 Aug. 2016.

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