Although the strength of the dollar is an indicator that the U.S. economy is on the rise, this could be a bad thing for other countries.
The dollar is expected to strengthen in 2017 since it’s likely the Federal Reserve will be going through with its plan to increase the rate multiple times. This depends on if the economy continues to strengthen, which is anticipated with president-elect Trump in office.
Expectations under a Trump presidency “have absolutely re-energized the dollar,” said Alan Ruskin, head of G10 foreign exchange strategy at Deutsche Bank to The Wall Street Journal. “This is a major shift in policy dynamics.”
But, this means other countries’ currency will depreciate.
“Right now, there is an incredible amount of pressure to sell just about every type of currency and buy the dollar,” said Christopher Stanton, chief investment officer at Sunrise Capital LP to The Wall Street Journal.
Stanton predicts that the Japanese yen, euro and Australian dollar will cause the U.S. currency to appreciate.
For China, the strengthening dollar is having detrimental effects.
“Chinese bond markets plunged in reaction to December’s Fed meeting, at which the U.S. central bank decided to lift rates and signaled several more boosts. Chinese regulators injected money to allay a possible credit squeeze, while stocks also fell,” writes The Wall Street Journal.
“China’s central bank has also had to drain $300 billion of its reserves in the first three quarters of the year, more than it spent in all of 2015, as it fought to slow the yuan’s decline against the dollar. China’s currency is down 4.3% against the dollar since October, falling to a record low.”
The dollar rose 3.1% in 2016 against the euro, yen and other markets according to The Wall Street Journal Dollar Index.
But what impact will this have for U.S. companies?
In terms of importing, a strong dollar is a good thing. Imported goods will be cheaper, along with the travel abroad costs for Americans.
As for exporting though, a strong dollar makes U.S. exporters’ goods more expensive and less competitive in the market amongst overseas companies. This could have an impact on corporate earnings and stock prices.
Emerging-markets companies that are in debt, may have more difficulty paying back the debt with a stronger dollar.
“In emerging markets, sustained dollar strength could undercut prices for oil and other dollar-denominated commodities, pressuring developing economies that export raw materials. Emerging-market companies and governments that have borrowed heavily in the U.S. currency will also find their debt more difficult to service,” writes The Wall Street Journal.
Again, this is all speculation but most experts see a fiscal stimulus in the near future.
Editor’s note: The problem with a stronger dollar is that our products will be more expennsive so exports may decrease. Fortunately Trump is focused on producing in America. If he can increase our exports while strengthening the dollar, the American economy will boom.