photo by Flickr user c_ambler
Americans generally like strength, in everything from our cars’ engines to our superheroes. But many Americans are alarmed that the dollar’s strength may have gotten out of control.
The dollar’s strength reflects a growing economy here, compared to economies elsewhere that continue to struggle. The euro recently traded at about $1.05 before rallying last week to near $1.08, which is still a startling drop considering it was trading closer to $1.40 a year ago. The British pound has fallen as well, from around $1.70 in July to $1.49 when I wrote this post. The Brazilian Real costs about $0.31, compared to about $0.45 last year.
The story in most of the news coverage is the potential effect on imports and exports. A strong dollar makes American goods more expensive for foreign buyers and tends to depress the U.S. manufacturing sector. This is true, but it misses the big picture. As Fortune pointed out, big multinationals these days are just as likely to purchase raw materials and conduct at least part of their manufacturing abroad; this may help offset the drag on earnings in cases where it applies. More importantly, the manufacturing sector is a relatively small part of our economy, and the portion of manufacturing devoted to goods for foreign export is smaller still.
A strong dollar will play out in many other ways across the U.S. economy, some positive but more of them less so.
By making American property more expensive for foreign buyers, the dollar’s recent strength will tend to cool property markets in certain areas that have been strongly rebounding from the housing crash with the aid of foreign money. Miami is already feeling the pinch. A recent article in the Miami Herald described the ways in which the city’s real estate market, especially for condominiums, is slowing down. A variety of causes have contributed, but a dwindling pool of foreign buyers is one of the primary culprits. New York, Los Angeles and other big cities on the West Coast are likewise exposed.
A weaker property market, in turn, means a slowdown in domestic construction jobs. In effect, when a drywall hanger works on a South Beach condominium that will ultimately be bought by a Brazilian, he is producing a good for export, though it will never show up that way in the trade figures.
Tourism is another area where a strong dollar will make a big difference. The drastic drop in the euro’s value means that many popular European destinations are on sale if you are paying in dollars. A strong dollar is therefore a boon for American tourists. But the news is not so good for Americans hoping to attract tourists themselves. That trip to Disney World planned by a German family suddenly became much more expensive; Disneyland Paris may get the business instead.
It isn’t all bad news. Thanks to a weaker euro, the drop in oil prices only benefits European refiners about half as much as it does Americans. And the devaluation of the euro can help strengthen the stagnant eurozone economy in the long run, which will ultimately be good for everyone. In fact, the euro’s crash is exactly what struggling economies, like those of Greece and Spain, needed. They simply could not engineer a falling currency on their own because they no longer have national currencies to manipulate.
The strong dollar is likely to be with us for a while, and it will probably put a small damper on the U.S. economy in the short term. Ultimately, these things find a balance. You just might not find it if the only place you look is the trade figures.