Strong dol­lar could defy Trump agenda

A strong dol­lar will add to the price of US ex­ports

Kuwait Times - - BUSINESS -

NEW YORK:

The strong US dol­lar, boosted fur­ther by the Fed­eral Re­serve’s de­ci­sion to raise in­ter­est rates, could pose chal­lenges to Pres­i­dent-elect Don­ald Trump’s eco­nomic agenda. The green­back shot to fresh multi-year highs against the euro and other cur­ren­cies Thurs­day fol­low­ing the Fed’s move Wed­nes­day to in­crease the bench­mark lend­ing rate and its sig­nal about ad­di­tional rate in­creases in 2017.

The US cur­rency al­ready had been on an up­ward tra­jec­tory af­ter Trump’s elec­tion, amid ex­pec­ta­tions he will push poli­cies that could un­leash higher growth and in­fla­tion, lead­ing to more in­ter­est rate hikes. Many an­a­lysts ex­pect the dol­lar to con­tinue to rise, af­ter gain­ing five per­cent against a bas­ket of six cur­ren­cies since Trump’s elec­tion.

“We would ex­pect the dol­lar to con­tinue to strengthen,” said Wells Fargo an­a­lyst Eric Vilo­ria. The Fed’s plans to raise rates fur­ther con­trasts with “what a lot of other ma­jor cen­tral banks are do­ing.” Trump him­self has warned of the neg­a­tive ef­fects of a strong dol­lar, say­ing dur­ing the cam­paign that “it sounds bet­ter to have a strong dol­lar than it ac­tu­ally is.” “If we raise in­ter­est rates and the dol­lar gets too strong, we’re go­ing to have some ma­jor prob­lems,” Trump told CNBC in May. In­vestors flock to mar­kets that have higher in­ter­est rates seek­ing bet­ter re­turns, which cre­ates more de­mand for dol­lars.

Pros and cons

A strong cur­rency has tra­di­tion­ally been seen as a sign of eco­nomic might among na­tions. But beyond that, there are some eco­nomic ben­e­fits. Con­sumers get bet­ter prices on ev­ery­thing from im­ported cloth­ing and toys to lux­ury cars, keep­ing in­fla­tion low. But while the US re­mains a strongly con­sumer-ori­ented econ­omy, data show ex­ports are be­com­ing more im­por­tant to the econ­omy.

Ex­ports of goods and ser­vices as a per­cent­age of US gross do­mes­tic prod­uct rose to 12.6 per­cent in 2015 from 9.1 per­cent in 2002, ac­cord­ing to the World Bank. “The US has been ex­port­ing more and more,” said economist Joe Naroff. “There is greater sen­si­tiv­ity of the econ­omy to the strong dol­lar now than it was five or 10 years ago.” A wide swathe of the US econ­omy now de­pends on ex­ports, in­clud­ing farm­ers in the mid­west, steel com­pa­nies in Ohio and chem­i­cal com­pa­nies in the Gulf Coast.

All of these sec­tors al­ready were suf­fer­ing from the strong dol­lar, ac­cord­ing to Fed­eral Re­serve’s “beige book” re­port on eco­nomic con­di­tions re­leased in Novem­ber. Although it also noted that man­u­fac­tur­ers can im­port raw ma­te­ri­als at lower prices. Trump has vowed an “Amer­ica First” ap­proach to eco­nomic pol­icy, pres­sur­ing com­pa­nies to build and keep fac­to­ries in the US. Yet a strong dol­lar will add to the price of US ex­ports, mak­ing it harder for them to com­pete in other mar­kets.

Multi­na­tion­als get hit

US stocks also have risen sharply since the elec­tion on op­ti­mism Trump will cut taxes, stream­line reg­u­la­tions and boost pub­lic works spend­ing, which would lead to higher cor­po­rate prof­its. Yet, a strong dol­lar hits multi­na­tion­als not only by mak­ing their goods more costly over­seas but by forc­ing them to con­vert over­seas earn­ings into dol­lars at a dis­ad­van­ta­geous rate.

Some of these neg­a­tive im­pacts will be off­set by other Trump pledges, such as a cut in cor­po­rate taxes. But “tax re­form tends to take a long time,” said Ai­dan Gar­rib, global macro strate­gist at Pavil­ion Fi­nan­cial. And Gar­rib pre­dicted the strong dol­lar would hit US com­pa­nies even more than in 2014, be­cause the green­back is even higher now. “For sure, the strong dol­lar will hurt,” he said. — AFP

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