Is your dollar stretching further in the checkout line? In most places, it should.
Continuing a spurt, which began in 2014, the dollar has strengthened rapidly in recent weeks on the back of U.S. economic growth and expectations that the Federal Reserve will hike interest rates faster in the coming years than in 2015 and 2016.Coupled with lackluster growth in European and Asian economies, the dollar is the preferred safe-haven for investors and consumers across the globe.
“Foreign economies, particularly Europe, are behind the U.S. in recovering from the Great Recession,” said Bill Adams, PNC senior international economist. “Our economy is almost back to normal, which bodes well for the value of U.S. currency.”
While the dollar’s strength generally brings good news for consumers, is it always good for the economy as a whole? Consider these six strong dollar impacts:
A strong dollar often translates into savings on food costs. According to the U.S. Department of Agriculture, 2016 was the first year since 1967 that supermarket prices declined on an annual basis. When the dollar is strong, it’s more expensive for U.S. producers to export goods, leaving a glut of domestic food goods in U.S. grocery stores at lower prices.
Conversely, imported goods - from inexpensive food goods to large luxury items - are cheaper when the dollar is strong. Foreign manufacturers that pay for materials and manpower in their home currency reap the benefit of a favorable exchange rate from consumers who pay for those goods in higher-value U.S. dollars.
The world’s oil market is priced in U.S. dollars. When foreign currencies are weak relative to the dollar, oil prices rises for foreign buyers paying in foreign currencies. Eventually that price hike lowers demand abroad and exerts downward pressure on the price of oil – making gas cheaper in the US.
If there’s one group that benefits least from a strong dollar, it is companies that rely on exports – particularly manufacturers. U.S. goods become more expensive in foreign markets when the dollar’s value is strong. For the same reason that foreign importers benefit from the strong dollar, U.S. exporters are at a disadvantage. Materials and labor, paid for in U.S. dollars, are reimbursed to domestic manufacturers in lower-value foreign currency after purchase.
The benefit of lower food, oil and consumer goods prices is more disposable income for U.S. consumers. That means more money to spend on eating at restaurants, entertainment and travel.
There may not be a better time than now to take that dream trip to the Bavarian Alps. The euro’s value relative to the dollar is at its weakest point since 2003, according to Adams. A hotel stay in Munich priced at 150 euros would cost more than $40 dollars less today than it would have in 2014 – when the current strong dollar cycle began.
With millions of Americans living within driving distance of our nation’s two borders, strong dollar cycles also can be a cost-effective time for travel within the continent.
There is no concrete rule for how a strong dollar impacts hiring. In general, Adams says, hiring in the service sector is boosted by strong-dollar cycles because those industries benefit from consumers’ higher disposable income. For manufacturers relying on foreign exports, however, it can be a time of stagnant employment growth or even decline.
Bureau of Labor Statistics employment data for 2016 backs that theory for at least the short term. Despite an uptick in December, the manufacturing sector lost 63,000 total jobs in 2016, while the Leisure and Hospitality industry added 295,000 jobs during the same time period.
Strong dollar cycles eventually end as the ebb and flow of the business cycle and geopolitical events cause markets to shift. Those shifts take considerable time though, Adams said, comparing a typical cycle’s duration to the time it would take a child to progress through elementary school.
The current cycle began in 2014 and Adams projects that it will continue through at least the next few years as The Federal Reserve begins a period of consistent interest rate hikes and the European Central Bank struggles to remedy debt crises on the continent.
The dynamics of a strong dollar might seem obscure, but they have a big impact on where and how people choose to spend their money.
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We believe the strong dollar is a key reason that real GDP in manufacturing lagged the overall economy in 2016.
- Bill Adams
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