The Strategist

Profound Impact Of Strong US Dollars

03/12/2015 - 19:11

Rising Dollar dampens US company’s sales and profits and increases US trade deficit.

Profound Impact Of Strong US Dollars
The strong combination of increasing Dollar along with rising expectation for hike in interest has sent the developing countries into a tailspin. The International markets have witnessed new pressures on currencies from Turkey and Brazil in second week of March 2015. The continuous strengthening of US Dollar had led the currency to hit a 12 year high record against Euro. This indicates signs of worry as it is hurting the US exports by making their product more costly. With the currency biting onto overseas revenue, the earnings expectations will lower down. All this will dampen the plans for investments in short run. Strong Greenback are pushing oil prices down. The slumping oil prices along with strong dollars have led to widespread worries across the markets. The oil prices are inversely related to the US dollar strength.

Moreover, the US Federal is planning to raise interest rates in 2015 at a time when its counterparts, Europe and Japan are easing their fiscal policies. More than 40% of the revenue for S&P 500 listed companies comes from overseas. These revenues are experiencing a set fall due to persistent strengthening of dollar. Rising Dollar and the US economic growth are providing consumers with higher purchasing power for buying more products. At the same time, uneven economic scenarios prevailing in Europe, Japan and slowdown in emerging nations has slashed demand for the US products worldwide. All these conditions have increased the US trade deficits, thereby creating greater implications on the US economy. Moreover, Fed officials stated that rising US Dollar will be persistently restraining the US exports in the near future.

Japan’s central bank has been implementing Quantitative Easing measures and slashing interest rates. Moreover, amidst the worldwide economic uncertainty, dollar is playing the role of safe haven for worldwide investors. The vitality of the role has increased further as Swiss Franc, which acted as one of the traditional haven took a remarkable turn in value in January 2015. Meanwhile, US government’s move of bond purchases signals robust growth of the US economy. The European Central Bank’s QE program along with negative deposit rates and excessive liquidity are pushing the global investors towards more risky investments which in turn will further pull down Euro. However, the European Central Bank anticipates a growth of 1.5% in the economy during 2015. The increase in Dollars is straining the Emerging market’s Balance Sheet that have borrowings in foreign currencies. However, it was persistent increase in Dollar that led EM Crisis in 1980 & 1990.

Rising US dollars are taking a toll on large American corporates including consumer sector giant, Procter & Gamble Inc., Technology Company Microsoft and even pharmaceutical’s Pfizer Inc. These companies have expanded their operations overseas and are now facing a tough time as sliding revenues are not able to meet dollar based costs. The dollar’s rise is acting as a drag on even the booming companies of the US. According to the National Association of Manufacturers projections, the US economy and its industrial production activities will record a growth of about 3% over the next 12 months.