The Almighty Dollar

The almighty dollar is mightier than ever since the global financial crisis. As the U.S. economy chugs along and most others struggle, investors are still flocking to it, enabling the U.S. to borrow lots of money at low interest rates.

American consumers can feast on it, buying imported goodies for less. U.S. politicians tout it as evidence of the economy’s eternal dynamism. Other countries are driving their currencies down, making their goods more competitive on the world market. Not the U.S. It stands out as the one nation that prefers its money superpower-strong. That’s a mixed blessing. The high dollar hurts some American multinational companies’ earnings by reducing the value of sales abroad. It pushes down inflation that’s already considered too low. For the rest of the world, danger lurks in surging dollar-denominated debt sold in emerging markets like Brazil and India; the stronger dollar makes those bonds harder to repay.

The Situation

The U.S. Dollar Index, which tracks the greenback against six major currencies, surged 23 percent from the start of 2014 to the end of 2015. The move toward higher interest rates in the U.S. — while they remain near zero or even negative in the rest of the world — is making the dollar more attractive, pushing its value up. Big-name American companies across an array of industries, including MasterCard, Tiffany and 21st Century Fox, blamed the dollar’s strength for crimping profits in 2015. By one estimate, U.S. companies have been getting hit the hardest in at least four years. A stronger dollar means a weaker yen, hurting U.S. automakers by helping Japanese competitors like Toyota, which make more money on each car sold in dollars. A slumping euro means good things for companies in Europe that sell in the U.S. Yet for emerging-market economies from Brazil to Malaysia, a rout in their currencies has lured capital away and limited growth. There’s also a slowdown in the high-end home market in places like Miami. Meanwhile, China roiled global markets with a surprise devaluation of the yuan in August and a poorly communicated shift toward pegging the currency against a basket of counterparts instead of mainly the dollar.

Source: Intercontinental Exchange, Institute for Supply Management
Source: Intercontinental Exchange, Institute for Supply Management

The Background

The U.S. economy became the world’s largest in the 1870s, yet the British pound remained the dominant currency. That changed starting with the creation of the Federal Reserve in 1913. World War I helped too by forcing other nations to suspend convertibility of their money to gold. The Bretton Woods agreement made the dollar’s preeminence official in 1945 as U.S. money became the standard used to fix exchange rates. As the postwar U.S. economy strengthened, so did the dollar. In 1995, Treasury Secretary Robert Rubin asserted that a strong dollar is in the U.S. national interest, a mantra repeated by each of his successors (though not always with conviction). Practicalities diverged from policy in 1985, when the Plaza Accord reached by the U.S. and the other four richest economies pushed down the dollar’s value for a while to slow Japanese exports. It didn’t last. The dollar remains the dominant reserve currency, used by countries to pay international debts. Even the global financial crisis of 2008 strengthened the dollar, as investors sought safety in U.S. government debt.

The Argument

The Treasury Department, now under Secretary Jacob J. Lew, is unwavering in its allegiance to the strong dollar. Elsewhere there are other opinions. A Deutsche Bank strategist says intervention might eventually be needed to support China’s yuan and weaken the dollar. Federal Reserve Chair Janet Yellen said in February that the dollar’s strength has harmed U.S. manufacturing and exports, though she signaled that it won’t stop the central bank from raising interest rates. As the European Central Bank and Japan continue to buy bonds to stimulate their flagging economies, investors are likely to pour more money into the U.S. The resulting rise of the dollar, warned former Treasury Secretary Lawrence Summers in 2015, could slow the economy significantly. So Americans should hold off on the champagne, even if the strong dollar makes it a bargain.

 

Source: BBG

 

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