Monday, March 16, 2015

Is a Strong U.S. Dollar Making Our Economy Sick?

Unless you follow the stock market, you are probably not aware that the U.S. dollar has been on a literal tear when measured against a "market basket" of six currencies such as the Euro, the Japanese Yen, the British Pound, etc.

As you can see from the above Bloomberg chart, back in July, the dollar could only buy about 80% of that "market basket" of other currencies.  Today,  the dollar is strong enough to buy 100%.  That's a 25% improvement in the buying power of the dollar.  As a result, the American consumer should see lower prices for imported goods; assuming the retailers are willing to pass those cost savings onto the consumer and not just take them as increased profits.

While, lowered import prices might sound like a good thing, it isn't if you are a U.S. producer who must compete against them.  Foreign cars will be cheaper against those made in this country.  Imported fruits, vegetables, seafood, and meats will crowd-out similar U.S. products in the marketplace.  Thus, this could cost jobs, limit profits, and also reduce the tax base that it is needed to run the country.  In addition, U.S. manufacturers would be more tempted to move their operations overseas in order to sell more cheaply back home.  That, too, would definitely cost jobs and reduce tax revenues.

But, while other countries imported products become cheaper, our exported products become more expensive to sell overseas.  In theory, if the U.S. dollar is 25% stronger against the Euro, this means that any product made in the U.S. -- like a Harley-Davidson motorcycle or a Caterpillar tractor  -- is now 25% more expensive to buy in Europe.  That fact may price some Europeans out of the market for those items.  So, all over the world, our products are getting more expensive and this, in turn, will hurt the taxable profits of our multinational companies.  As a result, layoffs could ensue.

Our fourth quarter economic growth was a weak 2.2%.  Because of the factors involved with a strong dollar, such as lower profits, tax losses, and layoffs, the first quarter of this year and each quarter, there after, may be even weaker.


U.S. Dollar Index:


Dollar gallops to fresh highs; stocks fall:

Strong Dollar Squeezes U.S. Firms - WSJ:

The economy grew 2.2% in the fourth quarter - USA Today:

Strong Dollar And Weak Global Economy Could Cause U.S. Recession:

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