The Relationship Between The US Dollar and US Economy
The US dollar has been bullish against all its peers globally since the election of Donald Trump as the 45th president of the United States of America in November 2016. The upward trajectory the dollar has been experiencing has not been reversed since the beginning of 2017 except for minor fluctuations from time to time based on global economic news. Though seen as a negative economic trend like President Trump said in a statement in January 2017, the strong dollar also has some benefits to the economy too.
Behind the growing strength of the US dollar there are several economic factors that are pushing it upwards. Among the major factors is the US economy itself that is poised to grow in the new Trump regime where job creation, infrastructure development and support for business growth are prioritized by the government. In addition, the interest rate normalization is underway in the US as other key central banks follow up with their own versions of asset-purchase programmes. In Japan and the Eurozone, the economies have been improving gradually but their central banks are locked into quantitative easing programmes. These interventions have resulted to lowered exchange rates in the interim; hence making the US dollar stronger against those partsicular currencies.
Winners in a strong dollar regime
A strong dollar has its own benefits for the economy at least in the short to medium terms. For corporations floating Eurobonds or an individual who had borrowed a personal loan in a foreign currency, the repayment of the loan becomes cheaper; hence making the repayment affordable. Traveling abroad from the US becomes cheaper too for US citizens since their purchasing power is increased. The increase in purchasing power does not come from an increase in the actual amount of dollars they have; but by the increase in the value of the dollar, hence they are able to buy tickets and other goods and services at relatively lower prices in dollar terms.
Other beneficiaries of the strong dollar are companies who import their products or raw materials from overseas. As the local currency in the country of origin for the imports continues to depreciate against the US dollar, imports from the country become relatively cheaper when valued in dollar terms. For instance if importing a car from Europe would cost 70,000 euros with an exchange rate of 1.35; the car would be priced at USD 94,500 in dollar terms. The same car would be priced at USD 78,400 if the exchange rate falls to 1.12 dollars per euro. The fall in import prices as the dollar strengthens therefore leaves more money in the hands of the US importers to spend on other things hence increasing consumptions which results to growth in the country’s GDP. On the other hand, for manufacturers who import raw materials, they are able to reduce their costs of production and record higher profit margins in their annual financial reports.
Losers in a strong dollar regime
The biggest losers when the dollar keeps appreciating are the US exporters. With a strong dollar, the exports become more expensive in the international markets which results to buyers looking for cheaper options from other countries. If the appreciation persists, its impact may be detrimental to the overall economy whereby there are a lot of imports and very few exports resulting to a growing balance of payments deficit; which is not good for the economy.
Companies with international operations and tourists travelling to the US also fall into the category of losers when the US dollar appreciates. With the local currencies in the countries where multinationals have operations falling, the companies will record lower sales in their books of account when translated to the US dollar; hence hurting their ultimate financial performance in the season of an appreciating US dollar. On the other hand, tourists traveling to the US will find goods and service in the US being more expensive since they have to exchange more of their local currency to get a dollar in the US. This will then discourage tourists from visiting the US and reduce the revenues US businesses could have collected from the tourists; and ultimately deprive the US government of tax it could have collected from the businesses and the tourists.
Bottom line, a strong dollar goes against the protectionist economic strategies the new US administration advocates for since it hurts US exports. How the Trump administration will curb the strength of the dollar is not yet clear due to the fear of reiteration from other countries such as China if they deliberately decide to devalue the US dollar. However, it is evident that President Trump is determined to stop or at least slow down the strengthening of the dollar in the near term; in order to effectively implement his campaign promises.