The dollar reached its highest level against major currencies since September 2003, as they ramped up bets the U.S. economy will pull ahead of the rest of the world this year, with the Federal Reserve in the driver’s seat. This is wonderful for US citizens looking to take trips abroad and for consumers buying imported goods. It has driven down interest rates on US bonds. Companies that outsource jobs to foreign countries pay less for those wages.
On the other side the dollar’s rise is causing mild headaches for some CFOs. Large US enterprises rely on foreign markets for 45% of their revenue. According to the WSJ “In last year’s third quarter, North American and European companies recorded $8 billion in currency losses”. For U.S. manufacturers trying to sell their goods abroad, the new year might not be any easier.
This swing in the dollar will most likely impair the already overwhelming US trade deficit. According to the WSJ US manufacturers that export are seeing head winds, largely due to weak demand in Europe and in Latin America, two of the main markets for U.S. goods.
As we all know a stronger dollar made U.S. products more expensive overseas and imports cheaper.
The Euro Impact:
Germany, the leader in Europe, is seeing real challenges. Russia’s decision to become an aggressor in the world followed by global sanctions has substantially impaired their economy. The folks in Washington are thrilled but it is causing hardship throughout Europe as Russia cannot buy goods.
In Europe, an unexpectedly soft inflation report from Germany raised concerns the eurozone faces a potentially lengthy period of outright declines in consumer prices, which may make it harder for the region to recover from its lengthy economic slump. Recent data showed consumer prices fell 0.2% in December from a year earlier, a larger decline than economists had expected and the first drop since October 2009. Falling prices in Europe are in part a result of tumbling oil prices and a symptom of weak demand in Europe.
This creates real challenges for US manufacturers looking to move goods into Europe.
Other Global economies:
Other global soft spots abound: Economic output in Japan contracted in the second and third quarters of 2014 and growth in China has disappointed, putting added downward pressure on commodities world-wide.
The seesaw is moving.
When the seesaw moves we hopefully will start to return to more normal times. The economic data discussed above continues to be a mixed bag creating uncertainty.
The US is not the economic engine it was in the 1940s and 1950s so help is needed from around the world to really start global economic improvement.
But the seesaw is moving and in capitalism this creates winners and losers, which creates economic activity.