In an extremely unexpected turn of events based on the United States economy of the past decade, the US dollar is the strongest it has been since former President Ronald Reagan sat in office. What’s going on? At least, that’s what many people are wondering, as the UK is bracing itself for a full blown recession, why is the dollar, which was in the not so recent past the weakest it has ever been in history, suddenly regaining it’s world power?
Business Insider reports in a new article entitled “4 ways a surging dollar rattles world economies, markets”:
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The U.S. dollar hasn’t been on a roll like this since Ronald Reagan sat in the White House and “Raiders of the Lost Ark” ruled the box office.
Since June 30, the greenback is up 28 percent against the euro, 18 percent against the Japanese yen and 40 percent against the Brazilian real. Not since 1981 has the dollar been so strong.
Some U.S. companies and investors wish it would take a breather.
Delta Air Lines said Wednesday that the strong dollar is hurting ticket sales in some foreign markets and announced plans to pull back international service, primarily in Japan, Brazil, India, Africa and the Middle East. Johnson & Johnson on Tuesday blamed the dollar, in part, for dragging its first-quarter earnings down nearly 9 percent.
Meanwhile, the International Monetary Fund downgraded the outlook for U.S. economic growth this year and next, citing the strong dollar’s damage to American exports.
The dollar is rising largely because the U.S. economy is outperforming most other developed economies and because U.S. interest rates are higher than those in Europe and Japan.
The run-up is having a big impact around the world. In the United States, it is pinching corporate profits, weighing on economic growth and delivering bargains for American tourists. In Europe and Japan, it’s providing relief for economies that have been ailing for years. And in the emerging markets of Asia and Latin America, it is threatening financial stability.
Here’s a look at the dollar’s far-flung impact on:
The rising dollar hurts U.S. companies that do business abroad in two ways: It makes their products more expensive — and therefore less competitive — in foreign markets. And it means that the revenue U.S. companies collect in euros or yen is worth fewer dollars when they bring the money home.
J&J, for instance, said unfavorable exchange rates reduced the value of overseas sales by 13 percent in the first quarter.
Overall, the outlook for first-quarter corporate earnings has steadily deteriorated as the dollar climbed. At the end of last year, analysts were expecting Standard & Poor’s 500 companies to register a 4 percent increase in earnings for the January-March period. By March 31, they were bracing for a 5 percent drop, according to FactSet and PNC Financial Services Group.
Earnings are expected to drop 12 percent for companies that get more than half their revenue outside the United States; the rest are expected to register flat earnings.
Weighed down by a strong dollar, U.S. exports fell 3 percent last year and were down another 1 percent the first two months of this year compared to January-February 2014. A drop in exports reduces U.S. economic growth.
Citing the dollar’s impact, the IMF on Tuesday downgraded the outlook for the U.S. economy. The IMF now expects economic growth of 3.1 percent both this year and next. That’s solid — and an improvement on 2014’s 2.4 percent expansion — but it’s down from the IMF’s January forecast of 3.6 percent growth in 2015 and 3.3 percent growth in 2016.
Meanwhile, Japan and Europe are poised to benefit from the dollar’s might.
The IMF predicts the Japanese economy will grow 1 percent this year versus an earlier forecast of 0.6 percent. It also upgraded the forecast for the 19 countries that use the euro currency to 1.5 percent growth this year (up from a January forecast of 1.2 percent).
In the emerging market countries of Asia and Latin America, the stronger dollar cuts two ways. Yes, it gives exporters a lift, but it also poses a threat to financial stability.
Enticed by low interest rates, emerging market countries borrowed heavily in U.S. dollars over the past decade. From 2005 to 2015, dollar-denominated debt — mostly corporate bonds and loans — shot up from $262 billion to $837 billion in the emerging markets of Asia and from $586 billion to $963 billion in Latin America, according to the Institute of International Finance.
As the dollar rises, it takes more local currency to generate enough dollars to meet loan payments. Emerging market corporate borrowers could get squeezed. The pain could spread if those companies suddenly withdrew deposits from local banks to meet their U.S. dollar payments, or if the investors who own the emerging market bonds get rattled and sell them in a panic.
In a report Wednesday, the IMF warned that “financial risks have increased in many emerging markets” and said a stronger dollar and weaker local currencies create “balance sheet strains for indebted emerging market firms” and for governments.
Things could get worse if the Fed this year decides to raise short-term U.S. rates, which have near zero since late 2008. That would draw more investors to the United States and drive the up the dollar even more. The IMF report warned that a Fed rate hike could cause “a bumpy ride” in financial markets.
The strong dollar makes European vacations cheaper for American tourists. Booking.com estimates that the average price for a four-star hotel room in Paris, Rome, Barcelona, Amsterdam and Berlin is down 21 percent from March 2014 because of the dollar’s rise against the euro. The company calculates that an American could spend 14 days in Barcelona for the price of seven days in Palm Springs, California.
Lyssandros Tsilidis, president of the Hellenic Association of Travel and Tourist Agents, said Greece has seen a 15 percent to 20 percent increase in reservations from the U.S. — Europe’s biggest long-haul market — compared to the same time last year. Spain saw a 12 percent increase in January and almost 19 percent in February.
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