The increasing dollar value compared to other countries may seem meaningless to our day to day lives. However, the currency exchange rates may have profound effects and impact on our economy.
Does a strong dollar affect you? At the beginning of the year, you could get $1.24 for a euro, and today, you can get $1.11. And the US dollar is still stronger against other currencies of the world. On our day-to-day routine, it does not seem to have any impact and you may think that it’s irrelevant to our economy.
However, the rise and fall of the US dollar does impact the economy. The US dollar is one of the primary currencies used for international trade. When you travel abroad, or sell US made products outside the United States, the value of the US dollar will certainly affect your business.
One of the main reasons why the U.S dollar is getting stronger compared to the rest of the world is the health of the U.S. economy. However, the implications of a strong dollar could have profound ripple effects.
“The stronger dollar is the sign of a healthier U.S. economy, but its strength has the potential to erode growth.” – Says John Ydstie (Dollar’s Rise Is Good News For The U.S., For Now : NPR)
Below we will see why a strong U.S dollar can hurt the economy.
A strong U.S Dollar can discourage foreign trade
Many companies in the United States engage in trade with foreign countries. They rely on selling goods and services overseas. When the value of the US dollar rises, the foreign companies must pay more to buy the product in order to compensate for the rise in value of the U.S dollar. In some instances they may buy less and it may discourage new businesses from buying U.S made products and they may look for similar products in other countries.
Fluctuations in currency may lead to a higher price of U.S made products in foreign countries, reducing demand. When companies lose demand for their products in foreign countries, they may have to reduce production, cut back on employees, and adjust to the changing dynamics of the trade.
Price of global commodities rise
Global commodities such as oil, gold, and silver and many other global commodities are bought and sold using the U.S denominated price. When the U.S dollar becomes stronger, suddenly the price of all commodities rises in the global market. As the price increases, demand decreases, and suppliers must reduce pricing to encourage sales and reach market equilibrium. When producers are forced to reduce prices to stay in the market, they may decide to cut their production budgets or enter a different business which is more profitable for them.
Strong dollar and weak global economy
“Strong U.S dollar and weak global economy could lead to recession,” says Mike Patton of Forbes.com. The global economy has been slowing down and very few countries have shown a positive progress compared to the dramatic economic growth of the United States in the third and fourth quarter of the year 2014. It’s making the U.S exports less competitive in the global market.
“Europe is close to recession and most countries are sporting a negative rate of inflation. Only a half dozen or so have positive inflation and the best is really no stronger than 0.50%. Also, the rest of the world’s largest economies have been slowing.” – says Mike Patton
This is bad news for the U.S exporters who rely on foreign trade. Big corporate giants who are tied with oil production and exports and global companies such as the Microsoft, which makes its significant share of profits from foreign countries, will definitely suffer by the fall of global economy. Rising dollar value also makes it difficult for emerging countries to pay back their debts. As the dollar value increases and their currency falls against the dollar, they end up owing a larger amount of money.
The dollar value is rising compared to the foreign currencies and the main reason is the economic health of the United States. According to experts, although a strong U.S dollar is bad news for exporters and businesses involved with foreign trade, it is good news for the general U.S consumers, for now. Even though it discourages exporters and foreign buyers, the U.S dollar will buy more goods and services in the foreign market. It means that the U.S consumers can enjoy more imported goods, such as French wine, Korean TV, and foreign oil at cheaper prices.
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Source: Institute of Ecolonomics
Related articles and resources:
- What Everyone Ought to Know about the Growth of the US Economy in 2014 | Institute of Ecolonomics
- Growth of the Global Economy and Outlook for 2015 | Institute of Ecolonomics
- Want a Better Life? Help our Economy to Grow | Institute of Ecolonomics
- 3 Reasons a Strong U.S. Dollar Can Hurt the Economy – US News
- Strong Dollar And Weak Global Economy Could Cause U.S. Recession