It’s not quite been a steady road, but since 2010, the dollar has strengthened by account of most metrics. Against the Euro, it strengthen significantly over the year of 2010 due to the Greek financial crisis. The debt crisis drove investors out of Greece and even out of Europe, where the US dollar was beginning to find its feet again after the subprime mortgage crisis in 2009.
Over the past decade, Europe has seen its fair share of crises. From the Eurozone crisis to terrorist attacks, there has been a lot of unstable events that has seen the dollar strengthened to a mere US$1.05 against the Euro.
To have almost a 1:1 against the Euro was quite profound, with it last (almost) happening in 2002. The dollar did weaken up until 2017, where the Euro ascended throughout the whole of 2017. Since the beginning of 2018 however, the dollar is regaining its position back towards a 1:1 relationship, with it currently being around 1.10.
Trump Prefers a Weak Dollar
For many economists, this is an impressive sign. A strengthening currency surely only means that consumers get to purchase more for their money, investment is flooding in and the economy is stable, right?
Well, for Trump, he mostly cares about the Balance of Trade. The Balance of Trade refers to the goods coming in and out of the economy. You don’t have to be a mercantilist to see why a net positive of exports is a good thing. Exporting more than you import means that more money is entering the economy than is leaving it, which will soon circulate around society.
Afterall, a lot of US manufacturing jobs in the past have been lost to China’s cheap currency, which Trump claims is unfairly manipulated. The US is in a trade deficit, and Trump wants to close that. The easiest way, without depressing wages and increasing productivity is to have a cheaper currency — a weakening dollar.
“I want a strong dollar, but I want a dollar that does great for our country, not a dollar that’s so strong that it makes it prohibitive for us to do business with other nations and take their business,” Trump claims during a speech in March.
The trade war with China illuminates the significance of China when it comes to US trade. Over the past 10 months, the dollar has strengthened from $0.15 to $0.14 against the Chinese Yuan. Trump also highlights that someone at the Fed likes a strong dollar.
How Does a Strong Dollar Impact More Sectors?
The logic of the currency strength and the trade deficit extends much further than just who can sell the most cars and plastic toys. A strong dollar weakens overseas commodity prices in general. It’s not just customers who get to buy foreign goods for cheap when the dollar rises, but investors too.
S&P 500 firms for example are usually hurt by the dollar strengthening. Most of its sales are generated overseas, as well as of course the price of shares being relatively more expensive with a strong dollar.
Likewise, property markets can be damaged by a stronger dollar too. Areas that rely on foreign sales will be significantly damaged, whilst more local residential property markets are less likely to be affected.
As we can see through, the president, large firms and many US investments are damaged by a strong dollar. The story isn’t always the same for everyone though. This is one of the reasons why money transfer companies in the USA are becoming a storm right now. Fluctuations in the dollar, up or down, can affect everyone for different reasons. To protect against this, companies offering much more competitive rates than banks as well as hedging tools are exploding in popularity as of late.
For example, smaller US companies often benefit from a stronger dollar. Their sales are usually less dependent on abroad than larger companies, as they sell domestically and are yet to globalise. Plus, their material or inventory that they import are now cheaper, which can increase their profit margins. Plus, many SMEs rely on outsourcing their work abroad, which larger companies tend to do in-house. It does depend on what the company sells though, as this tends to be more the case when US customers cannot turn to a cheaper foreign customer for the same good/service.
Of course, regular workers are usually welcoming of a strong dollar, as they can buy more for their money. In general, a strong dollar signals strength in the economy, which can indicate things such as low wages, rising employment and so on.
US expats around the world are most certainly rejoicing at a strong dollar too. Residing in a country with a different currency, and having your US salary rise by 10% because of the dollar strengthening can be a welcomed bonus for no extra work. Of course, the reverse is true for expats within the US, though.
As we can see, there are always winners and losers. Currency is pretty much a zero sum game, where really ‘wins’ in the long run. Beating the market is certainly not an option for even the most prudent of investors, meaning that hedging tools are the only real way forward for most of us. Hedging can remove uncertainty, which is the sole cause of most recessions. Uncertainty drives markets into the ground, causing self-fulfilling prophecies and irrational behaviour.
A market herded by emotion cannot be predicted. A market influenced by alleged governmental manipulation, also cannot be predicted. Foreseeing the dollar rise or fall isn’t the point, rather, knowing what its implications are and what benefits it situates you in is, as this can be leveraged in the right moments.