However, a stronger US dollar has very real
impacts. For decades, the dollar was weakening relative to other currencies.
But now, the situation has changed.Even if the change ends up being only temporary. here
are some of the ways a stronger US
dollar affects the economies of the United States and Europe:
1. US Domestic Industries Struggle with
Input Costs
For US companies with foreign workers in
developing nations, a stronger dollar means input costs related to labor are
smaller, since a stronger dollar can buy more of a weaker currency. That’s not
the story in the United States, though. With a stronger dollar, it means that
US domestic labor, paid for in US dollars, is more expensive. There isn’t a lot
of flexibility for these types of companies to compete on price without seeing
thinner margins. As ISM falls, there is potential for GDP growth to slow as
well.
2. US Exporters Likely to See Losses
Earnings season once again reminds us that
US companies exporting to other countries are likely to see problems related to
a stronger US dollar. With the dollar stronger relative to other currencies, it
means that exporters have to lower their prices in order to prevent buyers in
other countries from turning to less-expensive alternatives. This impact on US
company earnings can mean a lower stock market, as well as other economic
consequences.
3. European Companies Can’t Raise Prices
The ECB has been trying to keep the
eurozone economy on life support since the sovereign debt crisis. Recently, the
ECB instigated a quantitative easing program to help stimulate the economy with
the help of inflation. However, a stronger US dollar means that it’s going to
be harder for European countries to raise prices, even with the help of a
policy that encourages inflation. This means a difficult time for European
companies and earnings, even if eurozone countries gain a little help in the
realm of export.
4. Some European Exports Might be More Attractive
With a stronger dollar on tap, some
European exports might be seen as more attractive. However, this may not happen
to a significant extent unless EUR/USD
actually reaches parity – or the dollar strengthens to the point that it is
worth more than the euro. If the dollar’s rally continues, the eurozone might
get a little export help as more buyers turn to more moderately priced goods
from a weaker currency. That could help the eurozone economy recover a bit, and
be useful in the event that European companies can’t raise domestic prices.
5. Germany Likely to Benefit From Exports
The German economy is likely to be the
biggest winner from increased exports. German exports will be cheaper and more
attractive, thanks to a strong dollar. While this is likely to help the
eurozone economy overall, the fact of the matter is that it is also likely to
continue to widen the gap between German economy and the eurozone economies on
the periphery.
6. US Consumers See Cheaper Fossil Fuels
During the last few years, as oil prices
have risen and fuel has become more expensive in the United States, strides
toward an economy less dependent on fossil fuels have been made. However, now
that the greenback is gaining strength, oil, which is denominated in dollars,
is lower in cost. With cheaper fossil fuels comes a shift away from the
development of the sustainable energy economy, and that could impact the
overall economy down the road if oil prices rise again.
7. Oil Doesn’t Fall as Much for Europeans
While oil prices are lower in Europe,
because of a stronger dollar, the difference would not be so great. The currency difference means that the
drop wouldn’t allow European consumers to keep as much money in their pockets
(for spending on other things) as US consumers have.
8. European Tourism Industry Grows
Eurozone countries are seeing increases in
their economies thanks to tourism from the United States. US tourists are
visiting eurozone countries because it’s cheaper for them to do so, with the
value of the euro down relative to the value of the dollar. European economies
might see a little extra boost in tourism, as long as the dollar remains
strong.
9. Fewer Tourists to the United States
Of course, the flip side to a growth in
tourism in eurozone economies is a decrease in tourism to the United States. A
stronger dollar means it’s more expensive to visit the United States, something
that might pinch the American hospitality industry.
10. Cuts to US Imports Could Keep Inflation
in Check
The Federal Reserve has a target inflation
rate of 2.0%.. Right now, the inflation rate is nowhere near that level, and
it’s not likely to do so anytime soon., because the cut to import prices (a
stronger dollar means that imports to the United States appear cheaper to
consumers and others) will keep inflation in check. While the Fed has said it
will look at a range of factors – including unemployment – before raising
rates, there really isn’t much reason to raise rates as long as other factors
keep inflation in check.
11. United Kingdom Acts as an Economic
Bridge
Even countries not involved in the eurozone
are feeling the impact of a strong US dollar. The United Kingdom has been a
sort of “go between” since the dollar has strengthened. The pound has weakened
relative to the dollar, but remains strong relative to the euro. Britons can
add to the rise in tourism seen in the eurozone, and continue to act as an
economic bridge between the United States and the eurozone.
12. Russia Sees Mixed Results
Another European country impacted by the
strong US dollar, but that isn’t using the euro, is Russia. Russia sees mixed
results from a strong dollar. On one hand, a strong dollar means better export
numbers for the relatively weak ruble. On the other hand, though, the strong
dollar is driving down oil prices, and that hits Russia in one of its biggest
economic supports.
This
article was written by Miranda Marquit, and provided by Andriy Moraru- editor at
EarnForex. Check out EarnForex if you want to gain a better
understanding of how currencies and economic indicators work together, and how you
can benefit from global currency moves.
