During the last few years, the US dollar has grown in strength. Uncertainty about the world economy has led many investors and others to turn to the US dollar. Because the greenback is backed by what many consider the most stable tax base in the world, it is considered very safe. On top of that, the US economy is still the largest, and the greenback is still the de facto global currency. It’s hard to argue against the viability of the US dollar, and with all of the uncertainty right now, it’s not surprising that many turn to the greenback for a reliable investment.
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.
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