Does The World Need A Strong Dollar?

The answer to this question depends upon global economic conditions. A strong dollar may be helpful when the global economy is doing well and the US economy is growing as a strong dollar make imports into the US cheaper. Since US is the largest consumer of goods and services in the world, strong import demand from the US stimulates growth across the world. But, at this juncture, the US economy is shrinking and the global economy is sinking and the dollar is rising! If one has understood the above described correlation, it intuitively implies that a strong US dollar is hurting the global economy at this point of time.

The relationship between a strong dollar and a weak economy is not exactly converse, but somewhat similar. This is the time when one needs to prop US economic growth. Just a few months back, when the US dollar was weak, US exports were benefiting as a weak dollar made US exports cheaper. But a rapidly strengthening dollar is leading to US exports becoming uncompetitive and the mild growth that US exports were experiencing is headed for negative growth.

A strong dollar also has negative implications for the global economy. As a large quantum of international trade especially oil is dollar denominated, a strong dollar makes everything imported more expensive for other nations. For example, the Indian rupee which was exchanging close to Rs 40 per US dollar just some time back is now at around Rs 50 to the US dollar. This implies that all dollar denominated imports into India are getting more expensive in terms of the local currency. The strengthened dollar also seems to be diminishing the positive impact of reduce oil prices. More expensive imports in the rest of the world imply that inflation may be harder to contain. Though fallen oil and commodity prices have helped assuage inflationary pressures globally, a strong dollar is somewhat reducing the positive benefits.

A weaker dollar at this juncture could have helped boost US exports and restrain the recessionary tendency, the US economy is in. This in turn could have helped some job creation and helped boost sentiment and consumer demand. Though exports themselves may not be sufficient to bring the US economy out of the negative spiral, their negative growth will definitely perpetuate the negative economic cycle.

One may argue that a strong US dollar should help boost US imports, which could help catalyze other economies in the world. However, the US consumer seems to have gotten stuck in the negative psyche due to the prevailing economic scenario and consumer demand seems to be sinking. Even though imports into the US may have become cheaper, the absence of consumer demand is just not helping anybody. 

As a matter of fact merchandise exports by the US reportedly fell by 6 percent to around $155 billion recently, which is the steepest decline since September 2001. Exports of capital goods including aircrafts, which had clocked growth in July and August this year, fell sharply confirming our theory of a strong dollar hitting US exports. US imports from most parts of the world including Japan, Europe and South Korea took a hit, though imports from China remained robust. Thus, it appears that a strong US dollar at this point in the economic history of the world is causing more damage than good.

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