A Strong USA Dollar Harms Manufacturers in The United States
With the Federal Reserve looking to raise interest rates three times in 2017, next year is expected to be a good year for the U.S. dollar. That is, unless the strong dollar kills corporate earnings. According to Factset data, 30% of U.S. based S&P 500 firms earn more than 50% of their revenue from outside the United States. The value of this revenue is now less in terms of U.S. dollars.
The Wall Street Journal Dollar Index — a measurement of the U.S. dollar against 16 other currencies — hit a 14 year high in the last week of 2016. This is bad news for some U.S. businesses and emerging markets. A strong dollar is a threat to manufacturers in the United States. It makes their exports more expensive and their foreign earnings less valuable.
The pain of a strengthening American dollar would be especially be felt by U.S. factories. Under a strong dollar, America’s manufacturing production could be as much as 3.6 percentage points lower. To improve their financial future and increase economic growth to overcome a decline in exports, the United States’ policies must focus on lower taxes, lighter regulatory burdens, and include a plan to overhaul infrastructure.
A strong dollar could also be damaging to some emerging market economies. Since the Global Financial Crisis in 2008–2009, emerging markets have compiled a high amount of U.S. dollar-denominated debt. A strengthening dollar makes it harder and harder to pay off what they have borrowed. This could lead to a wave of emerging market corporate debt defaults that results in tight emerging market financial conditions, and even weaker domestic currencies. This would be incredibly troublesome for Brazil, China and Russia, who statistically have the highest negative correlation to the U.S. dollar.
Aside from the perils of debt repayment, emerging economies lose purchasing power when buying products or services from U.S. businesses. Under a strong American dollar, their currencies don’t go as far and they buy less imports from the United States. This is bad for U.S. economic growth.
The strong dollar is likely to continue to hinder U.S. manufacturing activity and export growth in 2017. This spells more trouble for America’s factories, as many U.S. manufacturers have been in recession since the end of 2014. As for investors, my recommendation is to seek the safety of alternative investments that pay returns in U.S. dollars.