Strong US dollar: The good, the bad and the ugly | Al Jazeera America

With economic sluggishness in Europe, a rallying greenback boosts US imports but limits exports

Strong US dollar: The good, the bad and the ugly | Al Jazeera America

Despite the lack of real wage increases and a shrinking middle class, the United States’ 5 percent growth in GDPduring part of 2014 has economists doing cartwheels. The stock market is rising, unemployment is falling and inflation is nowhere to be seen.

The booming dollar appears especially strong when compared with the euro, its main rival currency, which dropped to an 11-year low of $1.13 last month on increasingly dire forecasts for the continent. The dollar is also rallying relative to the British pound, Japanese yen, Chinese renminbi and many other currencies. The yen has slid more than 15 percent against the dollar in the last six months.

The dollar’s power suggests international confidence in America’s main economic indicators. With Europe’s economy struggling and China’s rapid growth slowing, skittish investors have flocked to the dollar as a safe bet. But experts say the impact of a stronger dollar is mixed. While it means many raw materials and other imports are cheaper for U.S. firms, it also means American exports are less attractive to foreign buyers.

The dollar’s rise is not necessarily a “favorable development,” said economist James Hamilton, of the University of California at San Diego. “It makes our exports less competitive.”

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U.S. multinational companies that rely heavily on overseas sales — such as airlines and beverage manufacturers — are hurt by the strong dollar. This is because their consumer goods are sold in many local currencies whose value is dropping. Raising prices is always an option, but making items less affordable could reduce sales. Most vulnerable are corporations with significant sales in countries like Venezuela and Russia, where local currency declines have been exceptionally sharp.

U.S. Steel reported lower fourth quarter profits due to the strong dollar, and Johnson & Johnson also said it facedslower sales due to a negative currency impact. Apple and Google both warned about “strong currency headwinds.”

American cars are one of many big-ticket items that could become more expensive for foreign consumers. Eventually this could affect U.S. automobile manufacturers, but given the rapidly changing currency situation, the effect on prices overseas and at home is hard to predict.

Hamilton said the current situation doesn’t reflect a surging U.S. economy as much as weakness in economies outside the U.S., particularly in Europe. It’s this fear that has global capital pouring back into the dollar.

“You can’t talk about it in isolation, whether it’s a good or bad thing,” Hamilton said. “It doesn’t exist in a vacuum.”

Of course there are areas where American consumers will benefit. Cheaper travel is in store for those looking to plan a great escape. Those who do vacation or live abroad stand to gain from the favorable exchange rates.

At the same time, U.S. businesses that cater to foreign tourists — from luxury-good shops to theme parks — could expect slightly fewer visitors spending less money.

Because oil prices are usually denominated in dollars, the benefit of cheaper fossil fuels is felt most by U.S. consumers.

Barry Bosworth, an economist at the Brookings Institution, said “workers and companies in tradable good industries” don’t benefit from the stronger dollar. He also said the U.S. government would not respond to corporate pressure to halt the dollar’s rise, instead leaving “the exchange rate to be determined by the market.”

Economists disagree whether a stronger dollar correlates to lower prices across the board. Arguing that the rising dollar is not a net positive for the U.S., Bosworth says only a limited segment of consumers stand to gain. So far, it appears run-of-the-mill shop owners have not felt any change from the robust U.S. currency.

“I’ve asked my vendors about savings, but that’s not happening yet on account of oil or a stronger dollar,” said Young Shin, the manager of Cafe Bistro in midtown Manhattan. He added that since distributors had not dropped any of their prices, his customers — a mix of local workers and foreign visitors — certainly would not see lower prices for his products, which range from European chocolate to fish from Korea.

“When the euro is more valuable, we do see more tourists,” Shin said. “But for now, there’s not much of a change.”

Deflated deflation concerns

For several years, U.S. inflation has been lower than the Fed’s 2 percent target. While the dollar’s boost could further push down consumer prices because of cheaper imports, policymakers also want to avoid deflation — a decrease in the average cost of things — which can create a vicious cycle that drives down incomes and increases joblessness.

To give inflation a chance to heat up, Hamilton said, the Fed could delay its widely anticipated decision to raise interest rates until later in the year. “If they were to start raising interest rates, that would cause the dollar to appreciate even more,” he said. Such a monetary policy is contractionary, reducing the amount of money in circulation.

But he downplayed the problem of inflation approaching zero.“Inflation numbers will be lower over the next few months, but I’m not so worried about a deflation scare in the U.S.,” he said, adding that deflation is a far greater concern for Europe and Japan.

The European Central Bank, keen on pursuing an inflationary monetary policy, is proceeding with quantitative easing — essentially printing money — to stimulate economic activity. In some ways, the weakened euro is a buffer against deflation, causing potentially higher prices and promoting cheaper exports.

Many economic pundits argue the dollar’s ascent will last through 2015, but economists like Barry Eichengreen are skeptical of claims that the U.S. currency will reach euro parity by the end of the year.

“History has repeatedly wrong-footed people convinced by which way exchange rates will go,” he said.

via Strong US dollar: The good, the bad and the ugly | Al Jazeera America.

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