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11 06 2015 | by Victor Xing | Economics

Is dollar strength good or bad for the US economy?

Dollar strength has both positive and negative effects on the U.S. economy.

Benefits of strong dollar

Stronger dollar increases purchasing power of U.S. consumers and businesses when paying for foreign goods and services.  For example, I am currently working with an excellent Montreal-based design agency for my corporate website, and USDCAD at 1.3304 really helps my budget and burn-rate.

Dollar strength in the form of higher USDCAD
USDCAD – higher amid dollar appreciation

A friend of mine recently went to Japan, and the exchange rate also reduced her travel expenditure.  She was able to dine at finer restaurants and stay at fancy hotels without changes to her budget.

Negative effects of a strong U.S. dollar

Stronger dollar makes U.S. goods and services less competitive (again referring to my decision to work with a Canadian web designer), and this directly impacts employment conditions for workers and businesses exposed to foreign trade and service contracts.

In the below graph, the blue line represents total U.S. export, and the gold line refers to Federal Reserve’s preferred measure of dollar valuation (Trade Weighted U.S. Dollar Index: Broad).  The red line represents Core CPI (Inflation ex-Food/Energy); even though stronger dollar push down durable goods prices (Core Goods), their effect sometimes pass-through into Core Services CPI and weigh on overall inflation.  What the red line doesn’t show is how much Core Services (rent, etc) have risen in recent years, and the aggregate inflation index has been weighed down by soft import prices and the decline in energy cost.

Dollar strength weigh on U.S. exports
Dollar strength weigh on U.S. exports

Therefore, aside from punishing U.S. manufacturing sector, stronger dollar can also push down realized inflation and inflation expectations, therefore affecting Federal Reserve’s policy reaction function (more hesitant to hike rates)

Next article11 06 2015 | by Victor Xing | Economics

How does the Federal Reserve measure productivity?