How A Stronger Dollar Impacts The US Economy

The U.S. Dollar Index, which measures the value of the U.S. dollar against a basket of foreign currencies, has gained about 3.2 percent year-to-date through Oct. 11. 

This is where the greenback stands year-to-date against other major currencies:

  • Euro: +3.4 percent
  • Pound: +2.1 percent
  • Yen: +0.5 percent
  • Australian dollar: +8.63 percent
  • Canadian dollar: +3.5 percent

Even against the tightly controlled yuan, the dollar was up 5.9 percent. Every morning, the People's Bank of China sets the midpoint for the trading band for the day and the yuan is allowed to move up or down merely 2 percent.

The greenback's gains against emerging market currencies have been steeper.

The MSCI Emerging Markets Currency Index, which tracks the performance of 25 emerging market currencies against the U.S. dollar, has declined 5.5 percent. The Indian rupee has depreciated about 16 percent against the dollar, and the Mexican peso is down 3.4 percent.

Factors Impacting Currency Moves

  • The strength of the economy: A stronger economy attracts investment into the country, boosting demand for the currency and translating to currency strength.
  • Geopolitics: Geopolitical risks such as elections, natural disasters, economic policy announcements and wars are likely to stir up uncertainty, reducing the appeal of a nation's currency.
  • Trade: When a currency runs up a trade deficit — when imports are more than exports — it has to buy more foreign currency to buy goods, while foreigners may have to buy less of the nation's currency, depressing its value. On the contrary, if trade terms improve, a nation has to buy less foreign currency, while at the same time demand for its currency among foreigners increases, firming it up.
  • Inflation: A higher inflation rate reduces the value of currency. Inflation suggests a rise in prices, which makes the goods and services of a nation less competitive in global markets. This in turn weighs down the value of the currency.
  • Interest rate differential: Higher interest rates attract foreign inflows, boosting the currency, and vice versa.
  • Debt: Higher national debt adversely affects currencies.

One Driver: Interest Rate Differentials

The Federal Reserve's tightening of monetary policy is one of the reasons behind the dollar's rally. After maintaining the federal funds target rates at extremely accommodative levels of zero to 0.25 percent from December 2008 to December 2015, the central bank began raising rates in small increments.

The fed funds target rate is currently at 2-2.25 percent following three quarter-point hikes so far this year, while the European Central Bank's refinancing rate is zero. The Bank of Japan's main policy rate, the overnight call rate, is at a negative 0.1 percent. 

This interest rate differential between the U.S. and most other economies has rendered U.S. assets attractive, leading to investment inflows into the U.S. to take advantage of higher rates.

A Robust Domestic Economy

The U.S. economy has been on a firmer foundation, although much of the strength is attributable to stimulating measures such as tax cuts.

Final second-quarter GDP estimates released by the Bureau of Economic Analysis show that the U.S. economy expanded at an annualized quarterly rate of 4.2 percent.

In comparison, the latest GDP estimates from the eurozone show 0.4-percent growth for Q2. The Japanese economy expanded 1.9 percent during the same period.

Trade War Chatter

President Donald Trump's imposition of tariffs on imports and threats of more to follow have triggered concerns about the hit to overseas economies — which has also contributed to the dollar's strength.

Other reasons include repatriation of overseas corporate profits, a move facilitated by the tax break signed by Trump. 

Stronger Dollar, Weaker Commodities

An unintended corollary of a stronger dollar is weakness in commodities, which are mostly dollar-denominated. When the dollar firms up, one can buy more of a commodity with the same dollar amount, trimming the demand for that commodity and in turn the price.

What A Stronger Dollar Means For The Economy

When the dollar is firmer, its purchasing power increases, as it can buy more imports denominated in overseas currencies.

Exports Tend To Fall

A stronger dollar affects exports in two ways:

  • Exports become expensive relative to offerings from other nations, reducing their competitiveness.
  • Export earnings translate to less dollars in the hands of exporters.

Inflation Falls 

A stronger dollar reduces the prices of imported goods into the U.S. This in turn forces down prices of higher-priced equivalent domestically-produced goods, bringing down inflation.

Yet the relationship holds true primarily when an economy is experiencing a boom, characterized by high growth and high inflation. During a recession, a stronger currency will reduce aggregate demand due to non-affordability, worsening the downturn.

See also: What's Behind The Divergence Between The US, Emerging Markets?

Multinationals Suffer

A domestic company with significant operations overseas faces the prospect of falling profits as it loses competitiveness vis-à-vis overseas companies.

Similarly, profits earned in overseas currencies, when repatriated, will translate to fewer dollars in times of a strong dollar. 

Investors in such companies may have to exercise caution. 

Cheaper Foreign Travel 

The greater purchasing power afforded by a stronger dollar allows the purchase of more goods and services denominated in a weaker foreign currency.

Emerging Markets Suffer Backlash

The jitters seen in emerging markets are mostly due to the dollar's strength and its potential impact. A stronger dollar makes its difficult to pay back dollar-denominated debt, making indebted nations default candidates. 

A stronger dollar drives fundflow out of the emerging markets into the U.S., as emerging market investors strive to take advantage of higher yields and higher interest rates in the U.S. This is negative for emerging market stocks.

The Dollar's Near-Term Outlook 

With the Fed fixated on continued monetary policy normalization, the dollar's strength may be here to stay. Yet the rally could see a hiccup ahead of the Nov. 6 midterm election on the grounds of political uncertainty, according to  CNBC, which quoted Derek Halpenny, European head of Global Markets Research at MUFG.

The euro could end the year at $1.18 against the dollar, firmer than the $1.155 level at which it's trading currently, according to the National Bank of Canada. The dollar is expected to end the year at 114 versus the yen compared to 112 now. 

Related Link: Inflation: What It Is, Where It Comes From And How To Protect Your Portfolio From It

Posted In: Canadian dollarCurrency manipulationeuropesoPoundus dollar indexyenyuanEducationEmerging MarketsPoliticsForexEconomicsMarketsTrading IdeasGeneral

11 Best Black Friday Deals on Amazon

11 Best Black Friday Deals on Amazon

The best Black Friday deals from Amazon are still coming hard and fast because the holiday is not yet upon us and the mega-retailer prefers to keep consumers on the hook for as long as possible—spending as much money as possible. 

To that end, here are some of the best Black Friday deals from Amazon that you might want to consider today.

Calphalon 10-Piece Pots and Pans Set

Regular Price: $172

Sale Price: $138.88

Calphalon’s 10-Piece Pots and Pans Set is designed with stainless steel, stay-cool handles along with pour spouts. The nonstick surface is PFOA-free and built with hard-anodized aluminum that is both durable and conducts heat extremely well. The set includes 2 fry pans, a sauce pan with cover, saute pan with cover and large stock pot with cover.

Apple AirPods 2nd Generation

Regular Price: $144

Sale Price: $85.49

The 2nd Generation AirPods from Apple connect to all Apple devices and give you an enhanced listening experience. Plus, they come with a case that keeps them safe and allows you to charge them in a secure environment. With over 24 hours of battery life, access to Siri and easy setup, you can start listening to your favorite tunes or podcasts today.

Adidas Ultraboost 21 Running Shoes

Regular Price: $129.98

Sale Price: $89.98

The Adidas Women’s Ultraboost 21 running shoe is perfect for anyone who likes a short run, maybe a 5K, half marathon or more. Coming in several colors and styles, you can slip these shoes on, enjoy the cushioned outsole, sink into the supple insole and secure laces.

Ninja AF101 Air Fryer

Regular Price: $129.99

Sale Price: $97.83

The Ninja AF101 Air Fryer allows you to crisp, roast, reheat and even dehydrate food products faster and cheaper than ever before. It has a 4-quart capacity and offers a wide temperature range along with several time settings so that you can customize each dish to your needs. Plus, all the parts are dishwasher safe.

Beats Solo3 Wireless On-Ear Headphones

Regular Price: $199.95

Sale Price: $99

Beats by Dr. Dre are among the best headphones on the market, and the Solo3 Wireless On-Ear Headphones include the Apple W1 chip, Class 1 Bluetooth and 40 hours of battery time. These headphones even have a built-in microphone and offer an adjustable fit so that you can be comfortable whether you’re listening to an Android or iOS device.

Hoover Power Scrub Deluxe Carpet Cleaner

Regular Price: $198.98

Sale Price: $175.98

The Hoover Power Scrub Deluxe Carpet Cleaner allows you to keep your home spotless and clean up after your pets. The cleaner comes with the Hoover Paws and Claws Deep shampoo and a storage mat to keep the floor dry once it’s put away.

LG CordZero Auto Empty Cordless Stick Vacuum

Regular Price: $999.00

Sale Price: $851.71

The LG CordZero Auto Empty Cordless Stick Vacuum and Wet Mop All in One Tower is designed to work in homes with several pets or children and clean up all the messes that life brings. The battery lasts up to 2 hours, and there’s an extra removable battery that gives you even more cleaning time and power.

Breville Fresh and Furious Blender

Regular Price: $278.60

Sale Price: $199.95

Breville, a top name in blenders and juicers, offers the Fresh and Furious Blender, featuring 50-ounce capacity, Vac Q technology, pre-programmed cycles, LCD display and lid with pull ring. With the Fresh and Furious Blender, you can make everything from a smoothie to a soup and everything in between.

Hot Tools Professional 2000 Turbo Ionic Hair Dryer

Regular Price: $89.99

Sale Price: $55.63

The Hot Tools Professional 2000 Turbo Ionic Hair Dryer is designed for professional use, but it works perfectly in the home. With 1875 watts of power, 6 heat and speed settings and a lightweight design, you can easily style your hair and utilize the diffuser, cut back on the frizz and stretch the 8 ft cord for maximum functionality.

Columbia Heavenly Long Hooded Jacket

Regular Price: $160

Sale Price: $97.38

The Heavenly Long Hooded Jacket from Columbia is designed to be light for everyday use, but it’s heavy enough to protect you from the cold. The plush fleece lining, security pocket, water resistant fabric, 2-way zipper, and zippered hand pockets make the jacket both protective and functional.

ConAir InfinitiPro Hair Dryer

Regular Price: $49.99

Sale Price: $29.99

ConAir is one of the biggest names in hair and beauty, and the InfinitPro is an 1875 watt hair dryer designed for professionals with ceramic technology. The dryer comes with a diffuser and concentrator, and it allows you to blow out your hair just the way they would at the salon.

Deals the Experts Are Hoping For

Experts believe that Amazon’s Black Friday sale could linger for quite some time. It all started with the Prime Early Access sale on October 11 and 12. Previously, Amazon has offered the “Epic Deals” sale that ran through late October. 

This is to say that any sale could come up at any time. 

Even so, those monitoring Amazon are looking forward to a few potential deals, including:

  • Apple Watch
  • AirPods (any generation)
  • MacBook Pro
  • Large, underpriced TVs
  • Amazon Echo
  • More small home appliances (Dyson or Shark vacuums, Instant Pots, etc.) 

While these predictions are based on last year’s Amazon Black Friday Sale, it’s important to remember that most Black Friday sales are fairly consistent and push the products that are most likely to sell.

 

Featured image sourced from Shutterstock

Posted In: Partner ContentGeneral