The Dollar: What You Need to Know
The strength of the dollar has increased steadily in 2015, and will continue to do so in the growth orientated economic climate of the United States. What has contributed to this? Throughout the world economies have been in a slump. Europe is currently in currently undergoing a stimulus program to help regenerate the economy.
Even with the stimulus, however, many European's are pessimistic that inflation will increase. Additionally, the financial woes of Greece have not helped the EU's financial situation. Moreover, Japan is undergoing a massive 29 billion dollar stimulus program. Essentially America is strong while other leading economies throughout the world are weaker in comparison. What are the direct impacts, both positive and negative, of a stronger dollar?
One of the most obvious impacts of a stronger dollar is cheaper imports. Thus, this transfers directly to the consumer's willingness to buy due to price decreases. Very broadly, this will aid in a strong and growing domestic economy. In terms of oil, the constant price decline and over supply accompanied with a strong U.S. dollar will help it remain extremely cheap. Cheaper oil prices directly contributes to a sharp increase in disposable income. However, exports will become more expensive. This effect is aiding to widen the U.S. trade deficit, as exports decrease.
The New York Fed Trade Model shows a 10 percent appreciation of the U.S. dollar is correlated with a 2.6 percent drop in in real export value. Furthermore, two out of three major U.S. exporters, who conduct at least a quarter of sales internationally, say the stronger dollar is negatively impacting their business. All sales made across the globe become cheaper, and key sources of revenue are lost. Yes, future currency contracts can help lesson this risk for multi-national companies. However, the strength of the dollar has increased extremely rapidly, which has caught many companies off guard. The impact of the strong dollar on market earning is very significant. It is estimated the S&P derives 40% of it's earning from international sources. Inversely, this is exceedingly positive for domestic companies.
Domestic equities are highly favorable right as investors try and ride the wave of companies that conduct a majority of sales in the U.S. This is also aided by the immediate economic future. The Fed's looming rate hike accompanied with the stimulus program in Europe make a strong case for the dollar to gain more strength as we near the end of 2015.