By David Guttery
Recently, the U.S. dollar reached an 11-year high in its value against the euro. It would seem that a strong dollar is good for the U.S. economy. However, the outlook is more complex than it may appear. As a consumer and investor, you might take a moment to consider the causes and potential effects of the rising dollar.
Fundamentally, the dollar is rising because the U.S. economy is gaining strength while many foreign economies are struggling. Investors, including foreign governments, generally prefer to hold a stronger currency. The potential for U.S. interest rates to rise in 2015, at a time when other central banks are taking steps to ease rates, makes the dollar even more appealing.
Dollars for oil
Global oil is priced in dollars, so a strong dollar tends to push prices down. When a dollar is worth more, a lower dollar-denominated price may provide the same value in oil. The strong dollar adds to the downward trend through the price/value relationship and by making it more expensive for weaker economies to buy the oil they need to grow, thus further reducing demand. At the same time, falling oil prices negatively impact the profits and currencies of oil-exporting countries, further strengthening the dollar.
A strong dollar is likely to cut into U.S. exports by making American products more expensive overseas, and to increase imports by reducing the cost of foreign goods. The effects of a widening trade gap will take time to unfold, and opinions vary about how significant this may be for our economy.
Weaker exchange rates against the dollar might help some U.S. trading partners increase their own exports and give their struggling economies a boost. If this occurs, a stronger global economy could help balance any negative effects of the strong dollar.
According to one estimate, U.S. households could realize a $700 average gas savings in 2015. More consumer discretionary income could boost retail sales, which play a key role in the larger U.S. economy.
Cheaper imported goods might also help American families. However, foreign-exchange savings may not always be passed on to consumers. Foreign travel should be a bargain as long as the dollar remains strong, especially if U.S. travelers purchase goods and services in the currency of the country they’re visiting.
The strong dollar, falling oil prices and economic weakness outside the U.S. have already affected the U.S. stock market and likely will continue to do so. However, the effects may vary widely among different business sectors and individual companies in each sector. There’s no reason to shift away from an appropriate long-term strategy, but you might keep a careful eye on specific investments.
In a global economy, strength or weakness in one region may influence others in ways that can’t always be anticipated. It remains to be seen whether stimulus efforts by foreign central banks will help lift their economies out of the doldrums.
For now, the pressing question is whether the fundamental strength of the U.S. economy can push through any headwinds caused by the strong dollar and weakness among our trading partners.
David R. Guttery, RFC, RFS, CAM, is Ameritas Investment Corp, and President of Keystone Financial Group, in Trussville. David has been in practice for 23 years, with a distinctive focus on the management of retirement assets for the production of durable income.