What a strong dollar means for US economy

by Paul Handley, Agence France-Presse

Posted at Mar 20 2015 10:03 AM | Updated as of Mar 20 2015 11:18 PM

A picture illustration shows US dollar and Euro banknotes on a pair of scales in Vienna. Photo by Heinz-Peter Bader, Reuters

WASHINGTON - US exporters and multinational companies are beginning to feel the pain from a dollar that has hit its highest level in 12 years.

But analysts say the greenback's sharp climb will only slightly slow the overall US economy.

From farm exporters to the chemicals industry, the moaning is growing more audible about losing competitiveness to competitors in Europe, Brazil and elsewhere.

On Wall Street, companies like IBM, Kimberly-Clark, Microsoft, Procter & Gamble, and Caterpillar have all blamed slower earnings on the currency.

Earlier this week software giant Oracle said revenues in its most recent quarter, at $9.3 billion, were 6 percent lower than they would have been if the dollar had held steady.

In the past year, the dollar has soared 32 percent against the euro, 39 percent against Brazil's real, 18 percent on the yen, 16 percent on the Canadian dollar, and 13 percent against the pound.

Overall, against a trade-weighted basket of currencies, the rise has been 20 percent. For US export rivals, that is a strong gain in their competitiveness.

It gives, for instance, farmers in Brazil and Canada big advantages.

"It has an especially large impact on the wheat and cotton sectors, where we export half of the crops or pretty close to it," said Richard Pottorff of farm industry specialists Doane Advisory Services.

Steve Meyer of Iowa-based consultant Paragon Economics says US pork and chicken exporters are beginning to feel the pain.

"Any time the value of the dollar goes up it makes our products more expensive."

"It's not as if you can't grow, but it certainly makes it more difficult. You've got to find some more creative ways to market your products."

'King Dollar' hits Wall Street

The problem is mounting as well on Wall Street, said Nicholas Colas, chief market strategist at the brokerage Convergex.

"If you run a US multinational company, or own its shares, 'King Dollar' is proving to be a bit of a tyrant."

Colas pointed out that analysts are slicing their earnings forecasts for listed companies.

They now predict an average 1.9 percent fall in revenue for the third quarter this year, compared to predictions of a 1.7 percent rise just two months ago.

"No company hedges for revenues so the impact on sales growth will be fully visible," Colas said.

Overall impact muted

Yet so far the strong greenback has only had a modest impact on the overall economy, in part because of the very strengths that underpin its surge.

"The US economy looks pretty good ... That's driving a lot of investment in the US as a bit of a safe haven," noted Chad Moutray, the chief economist for the National Association of Manufacturers.

Economists say that the economy's low dependence on exports also works to its benefit, in this case.

Exports make up around 10 percent of gross domestic product, whereas in a country like Germany, they are 50 percent, noted Nariman Behravesh, chief economist at IHS.

And with domestic consumption the primary driver of growth, the stronger dollar means lower import prices and so, potentially, more spending power for American families.

"If you look at the economy as a whole, the damage is fairly limited," Behravesh said.

Dollar's rise to continue

But if the dollar continues to climb, the pain could mount. A surprisingly dovish Federal Reserve cited the strong dollar's impact on exports for its downgrade of growth forecasts on Wednesday.

That send the dollar sinking four cents to $1.101 against the euro, for example.

But by Thursday it was back to $1.0665 and experts expect more strengthening in the coming weeks, heading toward euro parity.

"This headwind is going to be with us for a while, this is not temporary," said Moutray. "Manufacturers are going to need to find ways to compete."

Behravesh, though, notes that the dollar has swung much more sharply in the past, and the economy survived just fine.

"Our experience in the US is that, periods of dollar strength are typically followed by periods of dollar weakness," said Behravesh.

"Foreign exchange markets tend to overreact, overcorrect... Certainly by next year we'll see some firming up by the euro."

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