The U.S. dollar has reached a 14-year high following Donald Trump’s election win combined with the Federal Reserve raising interest rates for the second time in a decade. And while a strong dollar shows optimism for the U.S. economy, there is also a downside to the dollar’s strength. Surprisingly, Mr. Trump’s promises to strengthen the dollar and U.S. manufacturing may be at odds with each other. How can a strong dollar hurt the country’s manufacturing?
Strong Dollar Is Good For The Economy, But There's Also A Downside
As President-Elect Donald Trump prepares to take office, the conversation leading up to his inauguration has largely focused on improving the American economy and on the trade imbalance between the U.S. and China. And while a strong dollar is certainly good for the U.S. economy, it may not be quite so great for fixing the country’s trade imbalance with China.
There are certainly plenty of pros to having a strong dollar. With a surging currency, foreign goods are cheaper, allowing Americans to buy more for less. This in turn boosts retail sales and economic growth. Buying more for less is great for consumers, especially Americans travelling abroad. It’s also good news for the economy as a whole, as a strong currency signals faith in the economy, meaning U.S. assets become an appealing investment.
And while Mr. Trump can point to the surge as a win for the U.S. economy, there’s one big hiccup with this win. A strong dollar can actually hurt Trump’s biggest problem – to boost factory jobs in the U.S.
While a strong dollar makes importing goods cheaper, it also makes exporting American goods to other countries more expensive for those countries, meaning trade partners are more likely to purchase less. As a result, many companies who rely on overseas markets are modifying sales forecasts for the coming year to reflect smaller sales revenues. And since many of these companies are manufacturers looking to cut costs, factory jobs could be threatened as a result.
A strong dollar may prevent exporters from winning pricing wars, so American companies must compete on quality and efficiency if they want to win out against foreign competitors. Japanese exports will rise as the yen weakens, allowing Japanese companies to undercut American companies on price.
Mr. Trump will have a tough balancing act here, but if companies can find ways to optimize processes and reduce shipping costs, a strong dollar does not have to hurt manufacturing jobs.
Watch here what President Donald Trump speaks about strong dollar hurting US economy.
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