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Strength of US Dollar – An Export Headwind in 2015

Jan 21st, 2015

The US Economy is on a roll. A bullish stock market, unemployment continuing to descend to pre-crisis levels, economic output increasing a raucous 5 percent last quarter  – the strongest of the industrialized world, and oil prices plummeting with the US set to be become the world’s largest supplier of both oil and natural gas this year, all point to a rosy 2015 forecast for US consumers, manufacturers and service providers. Unfortunately much of the rest of the world is not enjoying such largess, including some key emerging markets like China and Brazil along with our major industrialized trading partners Japan and Europe (save for the UK).

Here’s the rub…..economic stagnation, price deflation if not full on recession plaguing much of the rest of the world lessens demand for US products, hurting US exports. Couple this with an economic resurgence here at home, impressive growth in GDP and a surging stock market all pushing up the value of the Dollar, foreigners are increasingly seeing the greenback as a great place to park savings – adding more fuel to the Greenback’s ascent making our products more expensive overseas.

Compounding our currency surge – the impending interest rate hike by our Federal Reserve – reflecting a stronger US economy less dependent on low interest rates to spur growth. With the central banks of our major trading partners contemplating expansion of their own easy-money policies to fuel growth, the likelihood is considerable that the strength of the US currency will continue into the foreseeable future. Such anticipated policy moves further drive up the value of the Dollar as investors searching for higher returns convert cash and assets into our currency.

A stronger Dollar is a double-edged sword, fueling welcomed foreign investment into the US, but often at the expense of those emerging markets dependent on that investment to power their own growth – markets that are increasingly destinations for American exports. Too, a stronger Dollar makes another key export, tourism, more expensive as costs for hotels, car rentals and meals increase along with the value of the Greenback for our foreign tourists, likely causing would-be visitors (and US travelers) to search other destination countries where our respective currencies stretch further. Understandably, international student enrollment at US colleges and universities too could be under strain as foreign-paid tuition (a huge US export), becomes more expensive.

According to International Monetary Fund data, exports now constitute nearly 15 percent of our GDP – highest percentage in our nation’s history – making any reduction in exports more impactful on our economy, putting an added strain on GDP growth.

Recently one of my clients lost a bid in Brazil normally it would win, against a rival product made in Australia. Over the past eight months, the greenback experienced a 15 percent surge against the Brazilian REAL compared with only a 2 percent jump by the Australian currency against the REAL – giving the firm from down-under a 13 percent price advantage. Sizeable!

What does all this mean? Just realize that your products may have a more difficult positioning in foreign markets in the short term due to the Dollar’s strength and softer demand overseas, and be cognizant of these currency moves and sensitive to your foreign distributors and customers who may take issue with your price point going forward in 2015.