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Why A Strong Dollar Is Not As Good As You Think

Stocks & Forex

Why A Strong Dollar Is Not As Good As You Think

To most people, a strong currency means a strong country. But that’s Tarzan-level thinking.

The leading proponents of a strong dollar are the big investment firms of Wall Street who work as asset managers or broker/dealers for foreigners. A strong dollar means more investors are buying U.S.-denominated securities – namely Treasury bonds or plain old cash.

In that sense, a strong dollar leads to the hyper-financialization of the U.S. economy. It is best to call it an overvalued dollar, as the dollar will always be strong even if the dollar index is trading slightly under 100.

When financial securities become the only business in town, it becomes a detriment to most other sectors of the economy. This is especially true for exporters and manufacturers who compete with companies abroad making the same thing. A Boeing 737 Max now costs more than the Airbus 320neo for airlines worldwide.

In an economy where companies are experiencing tighter margins due to inflation and less demand, a stronger dollar makes it is easier for them to source goods abroad, potentially putting their local suppliers out of business. If they are manufacturers themselves, they will outsource that work to Mexico or Asia, leading to layoffs and wage stagnation at home.

“The strong dollar has hurt several multinational companies in terms of less competitive pricing and foreign exchange losses of unhedged sales in foreign currency,” says Eric Merlis, Managing Director & co-head of global markets at Citizens. “This has reduced or put a damper on equity price gains.”

Principal Asset Management’s senior global strategist Seema Shah told the New York Times on Thursday that current interest rate policy at the Federal Reserve “is supercharging the U.S. dollar, limiting the ability of other global central banks to manage their economies adequately.”

Higher rates mean higher bond yields and fixed-income investors like that. They buy Treasury bonds, among other things. The Times article eluded to the Fed trying to convince the European Central Bank (ECB), Bank of England and the Bank of Japan to raise their interest rates in line with the U.S. in order to get their big investment firms to stop pouring money into the dollar.

Sebastien Galy, senior macro strategist at Nordea Asset Management, agreed that the U.S. is putting pressure on Japan and the ECB to raise interest rates. “The next leg of this might happen in Japan,” he says, citing threats from Washington to withhold some F-15 fighter planes to Japan.

Dollar Index, Highest in 20 Years

The dollar index is trading at around 111, its highest rate since 2002.

“The financial industry loves a strong dollar because it makes it easy to sell what they have on their shelves – securities priced in dollars,” says Ferry. “With so much international trade in manufactured goods and agriculture, every American producer in a strong dollar environment sees their goods costing more on world markets while foreign competitors are less expensive. You lose market share that way, too,” Ferry says. “The dollar is overvalued. We all know it. It’s bad for mostly everybody except those who sell financial securities.”

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Margarekt Tether

Journalist. I follow stock and forex markets

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