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How the Rising Dollar Ripples Across the Economy

The strengthening U.S. dollar is a double-edged sword for the economy and investors, and in our new report released today, you can see how it affects everything from prices at the store – and the pump — to jobs and inflation.

The dollar has risen about 15 percent since its low of June 2011, allowing Americans to enjoy lower prices for imported goods, and helping keep inflation in check. It can also lead to lower commodity prices, allowing Americans to pay less for energy and food.

But it has made exports more expensive, reducing U.S. manufacturers’ competitive advantage abroad. As domestic manufacturers reduce expenses, that can lead to job losses and restrain economic growth. And it can hurt stock prices of U.S. companies that do business abroad, as sales of their products in weakening currencies fetch fewer dollars.

“Many U.S. Treasury secretaries, administration officials and financial pundits have touted a strong dollar policy, but the impacts of such a policy are a mixed bag,” said Bob Hughes, lead author of Business Conditions Monthly, an AIER report which provides an outlook for the U.S. economy, and a read on inflationary pressures. This month’s edition, which focuses on the impact of the rising dollar, suggests a slightly weaker economy than last month, but forecasts continued growth in the quarters ahead, as well as subdued inflationary pressures.

In addition to the impact on the economy and inflationary pressures, the report highlights the strong dollar’s potential impacts and risks for investors in global fixed income markets and commodities, as well as U.S. equities and global equities.

Hughes said the dollar is likely to head even higher, as this country’s economy gains strength, and U.S. interest rates begin to rise while foreign central banks ease their own monetary policies. Consequently, investors may still have time to review their portfolios and make appropriate adjustments to mitigate the risks from a stronger dollar, Hughes said. You can read the full report for free by clicking here.

One Comment Post a comment
  1. I agree with the thrust of the commentary summary here. Strong Dollar policies tend to favor some economic sectors (finance, for example) over others (manufacturing and agriculture). In the Northeast, the argument might be, “What’s the problem?” but in the Heartland, those who produce things will find going forward a harder slog. It is difficult for the Fed to return to a more neutral policy (one that does not result in Strong Dollar) with the target interest rate already at zero. Going back to neutral would require (a) cessation of Fed intervention in all the markets where it is still intervening (e.g., stop FOMC purchases of securities for a while, which would let the portfolio shrink as obligations matured), and that includes the Reverse Repo market in New York (Fed artificially props up the interest rate, currently at +0.03 pct.; without the intervention, we would join Germany, Switzerland, Sweden, and Denmark in having at least some markets in negative interest rate territory) and (b) letting interest rates fall to a natural, market-clearing level, which could be strongly negative. The experience would be analogous to oil prices recently: The interest rate might fall a lot, but eventually it would reach a floor, and then rates could begin to rise in an environment of normal Fed operating procedures (buying AND SELLING securities to maintain the desired degree of pressure on reserves). It has been a long time (probably 6.5 years, in fact) since the Fed sold anything from the FOMC portfolio. — Walker Todd, Chagrin Falls, Ohio

    Like

    February 25, 2015

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