Dollar Worries are Overblown
November 10th, 2014 | By Nick Sargen
- The dollar has appreciated by 8%-9% against the Japanese yen and the euro this year. Thus, reflecting better economic performance in the U.S. and policy actions by the Bank of Japan (BOJ) and the European Central Bank (ECB) to combat deflationary pressures. The dollar has also risen significantly against several currencies that have been affected by falling commodity prices.
- Worries that the dollar's rise could weaken the U.S. economy are overstated: The trade–weighted appreciation is 4%, while U.S. trade accounts for just over 10% of GDP.
- The dollar's appreciation will impact U.S. multinationals' profits via translation effects, but the loss in U.S. international competitiveness thus far is modest. Also, U.S. businesses are highly competitive today, so the consequences for the broad market should be limited.
- Meanwhile, the dollar is likely to trend higher into 2015, especially against the euro, as the ECB will be struggling to overcome deflation while the Fed will contemplate policy tightening.