The U.S. dollar now owns the world. Recent reports suggest that foreign countries have borrowed $9 trillion in U.S. currency, which is up from nearly $2 trillion in 2000.
Such a dollar dominated global economy reflects with the recent plunging of the euro to near record lows, with the dollar rallying to a 12-year high against the European currency. A single euro is now worth just $1.06. In fact, the U.S. currency has risen about 24 percent against the other worldwide currencies since May.
Around the world, China’s productivity and overall economic growth is slowing and the Euro is being hit hard by the European Central Bank’s new (and failing) bond-buying stimulus program which is having a very hard time trying to find investors, who end up looking elsewhere. As a result, they begin looking toward the greenback.
The U.S. is having a job surge which is shattering expectations. The country added 295,000 jobs in February, reducing unemployment down to nearly 5.5 percent, continuing a nation-wide trend of adding 300,000 jobs a month over the last six months. This is one reason leading foreign investors to buy U.S. bonds enticed by higher returns. As a result, the U.S economy is seeing an increased demand of the dollar to a very robust high.
This isn't necessarily a good thing. Usually a strong U.S. dollar is associated with a strong overall American economy. Despite that traditional wisdom, there are many negatives to the strong U.S. dollar that policymakers should be very concerned with.
First and foremost, the biggest impact of a strong dollar is that U.S. exports will have a hard time selling their products priced in dollars. In fact, the current currency exchange situation only widens a trade gap between American and foreign companies. According to Paul Krugman, weak overseas currency like the euro, pound or yen makes foreign industry more competitive, as both their exports become cheap to sell worldwide and their imports become cheap to buy in overseas markets. In the meantime, the U.S. markets become less competitive as it is more costly for major American companies to export their products overseas. This is a direct result due to the rising cost of purchasing a product priced in strong American dollars.
This means that the major companies are losing profits, leading to weaker and sluggish stocks that become less enticing to investors. According to Bloomberg Business, many companies are already complaining about this as the impact of a strong dollar is already hurting profits and competition. For example, Ford Motor Company has cited that that a weak yen gives Japanese automakers as much as $11,000 more profit per car.
A strong dollar only ends up putting major pressure on American firms who expanded overseas in order to seek growth and profit but cannot keep up with dollar-based costs with shrinking sales. In general, the rising dollar is not good news for U.S. manufacturing as durable goods orders continue to fall for major companies. Export-based companies like Proctor and Gamble Co. have seen sales down by 4 percent and profit down by 31 percent, leading to a reduction of profits by $1.4 billion this year according to the Wall Street Journal. Other expanded American companies like Microsoft and Pfizer are reportedly also in danger of facing loses from the growing trade deficit.
As the dollar becomes stronger and other currencies become weaker, the U.S. economy is in danger of slowing down again because of a potential trade deficit. Events this upcoming week and how the Federal Reserve acts in June should determine the long-term impact of the strong dollar on the American economy.
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Editor’s note: The opinions presented in this column are the author’s and do not imply any endorsement from The State Press or its editors.
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