With the Greenback off to a roaring start for the first quarter of this year and a potential long-term reversal looming, one can’t help but wonder how the dollar’s strength is affecting the U.S. economy. Let me break down the good and the bad for y’all:
If you’re a frequent online shopper, then you’d probably know that a stronger local currency is usually good news for consumers. For instance, a replica cloak imported straight from Hobbiton in New Zealand priced at 100 NZD would cost fewer U.S. dollars when NZD/USD is trading at 0.7200 compared to an exchange rate of .8000. On a larger scale, businesses that import raw materials or other products would also be able to transact at cheaper prices.
With that, consumers and businesses could ramp up their spending to take advantage of these good bargains. Apart from that, lower costs should exert downward pressure on domestic price levels, as local businesses might also refrain from increasing prices in order to keep their products and services competitive.
In a nutshell, a strong U.S. dollar tends to support spending and keep inflation subdued. Of course U.S. dollar appreciation makes other currencies relatively weaker, which makes U.S. exports more expensive in the international market. This could also usher in higher trade revenues depending on the demand for U.S. products.
As I’ve mentioned earlier, a strong local currency can make the country’s exports more expensive in other countries. For instance, the new gold Macbook would cost more for Japanese folks to buy when USD/JPY is trading at 121.00 versus at an exchange rate of 116.00. But with other high-tech alternatives also available locally, these U.S. products might suffer much weaker demand in Japan due to their higher price tags.
If Uncle Sam’s trade partners all behave in the same way, U.S. export volumes could tumble and eventually take its toll on manufacturers. These companies could be forced to scale down their operations because of lower demand and might even lay off some workers, possibly leading to a slowdown in industrial production and hiring.
As for consumers, expectations of further dollar strength and consequently weaker inflation could lead them to delay their spending in anticipation of lower price levels later on. Just ask my bro Big Pippin who doesn’t mind waiting a few months for the PS4 to go on sale rather than buying it now!
As you’ve probably guessed, whether local currency strength is good or bad really depends on where the economy stands. If the country is hoping to keep a lid on inflation and spur local consumption, then currency appreciation would work in its favor. On the other hand, if an economy would rather see a pickup in export volumes, then a strengthening local currency might make things more difficult.
Based on my Monthly Review for the U.S. Economy, the country seems to be in a pretty good spot for now, as inflation and spending are picking up while trade activity has been stable. All that while the dollar has been zooming up the forex charts!
But of course as my all-time favorite 90s pop girl group, the Spice Girls, sang “Too much of something is bad enough… Too much of nothing is just as tough.” Hey, we all have our guilty pleasures! Dr. Pipslow is a huge fan of One Direction, might I add. Anyway, what I meant to say was that further dollar appreciation might wind up hurting U.S. inflation and spending, which could then weigh on business activity and employment.
Do you think that the U.S. dollar has already reached a top and is about to reverse though? Cast your votes in our poll below or share your forex market thoughts in our comments section!