What a Stronger Dollar Means for the Economy
JAN. 5, 2015
It just might be time to book that vacation in Paris you’ve been thinking about.
That is one practical conclusion to draw from a remarkable set of shifts in global currencies that started in the second half of last year and has continued in the early trading days of 2015.
The seemingly inexorable rise of the dollar versus the euro and most other currencies has broad implications for the global economy this year and beyond.
The seemingly inexorable rise of the dollar versus the euro and most other currencies has broad implications for the global economy this year and beyond.
The euro traded below $1.19 at times on Monday, the lowest level in nine years (it was $1.39 as recently as May). The dollar index, which tracks the dollar against six other major alternatives, is up almost 15 percent since June 30. Those swings are big enough to reshape the terms of economic interaction among the most powerful nations on earth — and will affect almost any company or individual doing business across national borders.
The underlying causes are straightforward enough. The United States economy is doing far better than most other advanced countries, achieving a recently revised 5 percent G.D.P. growth in the third quarter. The Federal Reserve is planning to raise interest rates this year, at a time its counterparts in Europe and Japan are pushing toward easier money.
But the consequences are quite a bit more varied, some straight from Econ 101 and others unique to the current circumstances.
Trouble for U.S. exporters? For American companies that compete globally and derive much of their income from overseas, things have gotten a lot tougher in the last few months.
If you are United States-based Boeing competing with European Airbus to sell jumbo jets around the world, or a California winemaker trying to persuade global buyers your product is better than its French and Italian counterparts, your competitiveness has fallen. Firms that must pay workers and buy raw materials in now-depreciated currencies like the euro and yen are effectively getting cost savings even without having to cut pay or renegotiate with suppliers.
That said, because the currency appreciation has its roots in an improving domestic economy, American manufacturers are hardly panicking. We’ve heard little complaining — so far at least — from business interests complaining that other countries are engaging in currency wars.
“The dollar is strengthening in many ways for the right reasons,” said Chad Moutray, chief economist at the National Association of Manufacturers, “because we’re one of the brighter spots in the world.
That will present a challenge in terms of growing exports, but at least to the extent we’re strengthening it’s because the U.S. economy is getting better.”
That said, if the appreciation goes much further, don’t be surprised if U.S. exporters start to pressure the government to apply diplomatic pressure to reverse the slide.
A less powerful stimulus from oil price declines overseas. One reason the United States economic expansion is picking up is that plummeting oil prices (and the lower gasoline prices that result) are leaving Americans with more money in their pockets.
But oil prices are almost always quoted in dollars, so the dollar appreciation exaggerates somewhat the extent to which oil prices are falling for most people around the world.
In Europe, notably, the benchmark price of Brent crude oil has fallen 53 percent when measured in dollars since June 30, but only 46 percent when measured in euros. Cheaper oil will be good for consumers everywhere, but the strong dollar means the shift is sharpest for Americans.
Even less U.S. inflation pressure — but a bit of help for Europe and Japan. One of the most intractable realities of the last several years is that inflation has been consistently below the 2 percent that the Federal Reserve and other major central banks aim for.
Inflation has been a bit below in the case of the United States (with 1.2 percent inflation in the last reading), and way below in Europe (a mere 0.1 percent in Germany, the government statistics agency said Monday). The rise in the dollar and decline in other currencies will tend to push U.S. inflation down and European and Japanese inflation up.
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In that sense, for the European Central Bank and Bank of Japan, the falling currency values could have a welcome effect of helping prices rise a bit faster, at least temporarily. For the Federal Reserve, meanwhile, it could mean even lower inflation and more latitude, should its leaders choose, to wait longer before raising interest rates.
A different travel landscape. Americans thinking of traveling overseas are winners in the currency swings. Conversely, travel-related firms that cater to foreigners in the United States are losers.
This is really a variation of the point above about a strong dollar creating challenges for exporters, in the sense that a Japanese tourist who visits California and spends $5,000 has pretty much the same impact, in terms of trade and balance of payments effects, as our California winemaker shipping $5,000 worth of wine to Tokyo.
But as people make their summer plans, the fact that, for example, European destinations are 12.5 percent cheaper than they were six months ago in dollar terms could both make locations abroad more attractive to Americans and U.S. travel less attractive to would-be foreign visitors.
The effect shouldn’t be enormous, argues David Huether, the senior vice president for research at the U.S. Travel Association; their analysis suggests that a 10 percent rise in the dollar should translate into only a 0.2 percent drop in the number of visitors from abroad.
“The value of the dollar will have some impact, but I think travel will be less impacted than other goods and services, where a piece of steel is a piece of steel,” said Mr. Huether, arguing that the United States’ distinct offerings are attractive enough that travelers will pay a higher price to visit.
Barring a reversal in currencies, 2015 is shaping up to be a year of testing just how high a price they’re willing to pay.
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