If you’ve traveled outside the U.S. recently, or sent your U.S.-made products abroad, you’ve probably noticed that the dollar is getting stronger. The stronger dollar is the sign of a healthier U.S. economy, but its strength has the potential to erode growth.
There are a number of factors behind the dollar’s rise, says economist Jens Nordvig, a currency expert at Nomura Securities. The main one is the health of the U.S. economy.
“When you compare the U.S. economy to the rest of the world, you really have a situation where there’s a pretty dramatic outperformance of U.S. growth relative to European growth, Japanese growth, or global growth in general,” Nordvig says.
But Simon Johnson, former chief economist at the International Monetary Fund, emphasizes that the dollar’s climb is relative. The dollar is being measured against the currencies of other countries.
The strength of the dollar, he says, is “also about problems elsewhere in the world,” including Europe, Japan and emerging markets.
Europe and Japan are both struggling to grow at all. The dollar’s value has risen about 15 percent relative to the euro and the yen just since the summer.
Nordvig says there are a number of channels through which the dollar is pushed up. One is driven by global investors who want to share in the gains the U.S. economy is making.
“That can be foreign companies buying U.S. companies — we call it foreign direct investment,” Nordvig says. “That flow has picked up over the last 12 months.”
Global investors can also decide to buy individual U.S. stocks. But both foreign direct investment and buying stocks require buying dollars to make those purchases. The greater demand drives up the dollar’s value.
It’s also pushed up by the prospect of higher interest rates on U.S. government bonds. The Federal Reserve has signaled it will begin raising rates around the middle of this year. But even now, Nordvig says, the returns on U.S. 10-year Treasurys are four times that of comparable German bonds.
Both European and global investors are obviously looking at these higher rates, he says, “and they are making transfers out of European investments and into U.S. investments.”
The stronger dollar is good news for U.S. travelers, whose dollars buy more in foreign countries. It also means that U.S. consumers can purchase imported products more cheaply — from French wine to South Korean TVs to foreign oil. The stronger dollar puts downward pressure on global oil prices, although it’s a minor factor in oil’s current fall.
But Johnson, who is now a professor at MIT, says the stronger dollar can hurt some Americans.
“If you’re exporting from the U.S. — manufacturing, for example — and your costs are in dollars, then it’s become harder to export or your products and more expensive in foreign currencies,” he says.
Dyke Messinger’s company in Salisbury, N.C., manufactures machines that make curbs and gutters. “We’re beginning to see our customers mention [the stronger dollar],” he says.
Messinger says his German competitor’s pricing “may be slightly more favorable than it was. It really hadn’t been a factor, but now people are beginning to notice and so we’re having to adjust a little bit.”
For now, Messinger says, the strengthening U.S. market for his product is offsetting any difficulty the stronger dollar is causing in the export market. So, the trade-off is worth it. But if the dollar strengthened an additional 15 percent, Messinger says it could start to bite.
Nordvig, of Nomura Securities, does not expect that to happen this year. But he does expect the strong growth trend in the U.S. to continue.
“We have some headwinds,” Nordvig says. “The dollar being stronger is going to be negative for some specific companies that export a lot, but I think the positives outweigh the negatives.”
Those positives include an improving job market, falling energy prices and more optimistic consumers.