Why a stronger US dol­lar could hin­der Trump’s plans

Kuwait Times - - BUSINESS -

WASH­ING­TON: Pres­i­dent-elect Don­ald Trump’s am­bi­tious plans to re­vive ex­ports, re­turn jobs to the United States and in­crease oil drilling are run­ning up against a home-grown threat: The surg­ing US dol­lar. Since the Nov 8 elec­tion, the dol­lar has shot up 5 per­cent. An in­dex that tracks the dol­lar against other ma­jor cur­ren­cies reached a 14-year high af­ter the elec­tion be­fore dip­ping a bit since then.

In part, the dol­lar’s gain re­flects the US econ­omy’s strength and in­vestor con­fi­dence that Trump will ac­cel­er­ate growth by slash­ing taxes and pump­ing money into roads, bridges and other in­fra­struc­ture.

The dol­lar could rise even more now that the Fed­eral Re­serve has raised in­ter­est rates and fore­sees three more hikes next year. With rates far lower else­where in the world, many in­vestors will shift money to the United States to cap­i­tal­ize on higher yields - a shift that could send the dol­lar even higher. Which cre­ates a prob­lem: An ex­pen­sive dol­lar makes US goods costlier over­seas - and im­ports cheaper in the US. That’s a recipe for more pain for Amer­i­can man­u­fac­tur­ers. A high dol­lar can also lead some US multi­na­tional com­pa­nies to move op­er­a­tions to coun­tries where their dol­lars go fur­ther.

And a high-priced dol­lar tends to shrink oil prices, thereby dis­cour­ag­ing the in­creased en­ergy pro­duc­tion that Trump has made a cen­ter­piece of his eco­nomic plans. “A strong dol­lar will make it more chal­leng­ing to boost the in­ter­na­tional com­pet­i­tive­ness of US man­u­fac­tur­ing, bring back jobs and in­crease ex­ports,” says Eswar Prasad, pro­fes­sor of trade pol­icy at Cor­nell Univer­sity.

Even be­fore the elec­tion, a com­par­a­tively strong dol­lar had slowed US ex­ports for much of the past two years. Ex­ports of goods and ser­vices had peaked in Oc­to­ber 2014 at $200 bil­lion. The fig­ure fell to $179 bil­lion in March be­fore re­cov­er­ing slightly as the dol­lar weak­ened. But then the dol­lar marched back up and ac­cel­er­ated af­ter Trump’s vic­tory. It was no sur­prise when US ex­ports fell nearly 2 per­cent in Oc­to­ber, ac­cord­ing to the Com­merce Depart­ment.

Con­sider what the strong dol­lar does to US cor­po­rate earn­ings, too: What­ever rev­enue Amer­i­can com­pa­nies earn in for­eign cur­ren­cies is worth less once it’s ex­changed into US dol­lars and re­turned home. In re­cent weeks, Amer­i­can com­pa­nies, from Whirlpool to Ap­ple, have com­plained that the strong dol­lar has dented their earn­ings.

At Vaughn Man­u­fac­tur­ing Co in Nashville, Ten­nessee, the com­pany pres­i­dent, Mark Vaughn, is fret­ting about the dol­lar’s 11 per­cent rise against Mex­ico’s peso since the elec­tion.

Around 20 per­cent of Vaughn’s tool-and-die busi­ness is done in Mex­ico. And the com­pany com­petes with Chi­nese and Korean com­pa­nies that aren’t sad­dled with an ex­pen­sive cur­rency.

“It’s a con­cern,” he says. A ris­ing dol­lar can en­cour­age US com­pa­nies to move fac­to­ries and jobs over­seas be­cause it makes for­eign in­vest­ments cheaper. Trump, of course, has pledged to stop Amer­i­can com­pa­nies from tak­ing op­er­a­tions off­shore. He’s even threat­ened to im­pose a 35 per­cent tax on com­pa­nies that leave Amer­ica and then ship goods back to the United States. The dol­lar’s rally could also com­pli­cate the pres­i­dent-elect’s plans to spur oil drilling by re­duc­ing environmental reg­u­la­tions. Oil is usu­ally bought in dol­lars. So the higher the dol­lar’s value, the fewer dol­lars are needed to buy a bar­rel of oil. The re­sult is that the dol­lar-de­nom­i­nated price of oil drops. When oil prices drop, en­ergy com­pa­nies tend to cut in­vest­ment in drilling and pro­duc­tion. Low oil prices are the main rea­son US busi­ness in­vest­ment plum­meted late last year and in the first half of 2016, thereby slow­ing the econ­omy. Oil prices have risen since Trump’s vic­tory but could re­treat again if the dol­lar keeps ris­ing. The Trump tran­si­tion team didn’t re­spond to re­quests for com­ment. Wil­liam Cline, se­nior fel­low at the Peter­son In­sti­tute for In­ter­na­tional Eco­nomics, says he wor­ries that the strong dol­lar could in­cite con­flicts be­tween the US and its trad­ing part­ners some­thing that hap­pened dur­ing the Rea­gan ad­min­is­tra­tion in the 1980s.

De­spite his rep­u­ta­tion as a free trader, Rea­gan used tar­iffs against Ja­panese mo­tor­cy­cles and semi­con­duc­tors, which had en­joyed a price edge in the US mar­ket re­sult­ing from a sharp rise in the dol­lar. It took an ex­tra­or­di­nary 1985 meet­ing at New York’s Plaza Ho­tel to craft an ar­range­ment with Ja­pan, Ger­many and Bri­tain to re­duce the dol­lar’s value and ease ten­sion.

Trump, who threat­ened to tear up trade treaties and im­pose tar­iffs against Mex­ico and Ja­pan, might be even quicker to im­pose sanc­tions against what he sees as un­fair trade prac­tices, po­ten­tially trig­ger­ing a wider trade war. In an anal­y­sis it did be­fore the elec­tion, the Peter­son In­sti­tute warned that the United States could lose nearly 4.8 mil­lion jobs in a trade war that would re­sult if Trump im­posed the tar­iffs on Mex­ico and China - and they re­sponded with equal tar­iffs of their own.

“The tricky thing in the case of Trump is if his ad­min­is­tra­tion sees trade deficits as the re­sult of un­fair trade” and not of eco­nomic forces that are push­ing the dol­lar higher, Cline says. “You could get into a lot of trade con­flicts.” — AP

CI­U­DAD BO­LI­VAR: Peo­ple queue out­side a su­per­mar­ket to buy ba­sic food and house­hold items, af­ter mas­sive loot­ings took place in Ci­u­dad Bo­li­var, Bo­li­var state, Venezuela, on Mon­day. — AFP

— AP

CAIRO: A man walks past a poster show­ing a US dol­lar out­side an ex­change of­fice in Cairo. Pres­i­dent-elect Don­ald Trump’s am­bi­tious plans to re­vive Amer­i­can ex­ports, keep jobs in the United States and en­cour­age oil drilling face a home-grown threat: the surg­ing US dol­lar.

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