What do people mean by the term ‘Strong Dollar’?
Basically, it means that the dollar is stronger in relation to other currencies.
Cristopher Magee, Economics Professor, at Bucknell University says,
“A strong dollar means that the U.S exports are more expensive for foreign citizens to buy – and imports into the U.S. are cheaper for Americans to buy.”
How Does The Dollar Become Strong?
When it comes to the Dollar, there’s a lot the Federal Reserve can do.
According to Magee, the dollar value increases when the Fed pushes U.S. interest rates to attract foreign investors into buying assets like bonds.
Global investors view the United States as one of the strongest economies and the safest place for investment, hence shifting their money to the U.S.
Together, all these give rise to the e value of a strong dollar.
How are Consumers Affected by a Strong U.S Dollar?
Kristina Hooper, Chief Global Market Strategist of Invesco says the strong US dollar can be positive for a Consumer, especially because many consumers buy a significant number of their products overseas.
You can argue that a strong USD implies an inflation fighter for consumers because they are seeing costs coming down in terms of goods. The problem arises for companies that derive their revenues from outside the US.
American businesses can be potentially hurt by the persistence of a strong dollar.
On the other hand, a strong dollar is a boon for an American traveler.
Cristopher Ball, an associate professor of Economics at Quinnipiac University says,
“In a global market, there is a second value of the dollar that matters. The international value of the dollar is what we can buy from foreign stores, producers, and even restaurants and hotels if we travel.”Find out Biden’s $1.9tn stimulus for saving the US economy.
If you are Apple, IBM, or Nike and sell lots of products overseas, the demand for those products may go down now.
Yes, for sure.
We can’t really paint the situation with a broad brush because there are some companies that are likely to hold up better due to less sensitivity to price changes, and that tends to be strong brands and unique products, but yes, in general, big multinational companies will experience an impact.
Is That Why the Stock Market is Concerned About the Strong Dollars Hitting Corporate Profits?
That’s certainly one of the concerns. We’ve got a lot of headwinds right now, so it’s the strong dollar, and again, that’s largely impacting the bigger companies, the ones with more foreign exposure.
Some companies in the S&P 500 only derive a smaller portion of revenues from outside the US.
But it’s also about tightening and the kind of rapidity that we’re seeing.
These great heights are coming fast and furious, and it’s tightening financial conditions, and that is creating headwinds as well.
How Are Other Nations Affected by a Strong U.S Dollar?
A strong dollar can be both good and bad for other nations, depending on how it’s perceived.
The Good – As US consumers import more and more products from emerging markets, these nations benefit from greater trade and profits.
The Bad – Strong dollar makes it harder for emerging countries to trade with the US market as they are subject to unavoidable inflationary forces. Emerging countries like Vietnam, Poland, and Thailand have only just started to harbor a strong middle class.
A lot of these emerging countries rely on American debt for their development. Given a strong dollar is persistent, it’s going to be harder for them to pay off the debts, leading to a wave of debt crises like the one the world experienced in the 1980s.
This could trigger problems in the U.S financial system as they are the ones owing these emerging economies..
Depending on where you stand in the economic gamut, your perception of a strong dollar can vary. Economists argue that a strong dollar can help curb inflation; however, preventing the local businesses from considering merchant cash advance loans in the short run. As American producers compete with foreign producers to market their products, bringing down costs and prices, down goes the local market inflation. People are able to consume more while spending less.
All in all, is the strong dollar a good or bad thing?
According to Magee, It is beneficial for U.S consumers & firms who rely on imported goods, while it’s hurtful to the rest of the world owing to the U.S economy.