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A Debilitating Dollar Stateside?

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By Peter G. Hall
Vice-President and Chief Economist Export Development Canada

In our slow-growth world, one economy stands out from the rest. US growth has been nothing if not spectacular for the last year-and-a-half, notwithstanding weather and public-sector mishaps. But post-crisis reticence has left a lingering fear that it won’t – or can’t – last. It seems we are still at the mercy of the monthly data, or worse, nervously scanning daily developments. Among them is the latest cause for concern: the appreciation of the greenback. Is this the big wrecking-ball that will take out the only home-grown good-news story the economic world can print?

The US dollar’s recent about-face is hard to ignore. Since mid-2014, it has climbed 13 per cent on a trade-weighted basis, and is showing little sign of a let-up. That’s a sudden and considerable loss of competitiveness that under normal circumstances has a significant negative impact on export performance, and in particular the manufacturing sector – causing the trade deficit to widen. It also makes investing in the US that much more expensive than elsewhere. And of course, mega-movements like this currency shift rattle financial markets, and can create problems with overall market confidence. Together, these traditional responses have market-watchers on edge. Is budding nervousness justified?

It might be, if the US economy was especially dependent on exports. However, at 13 per cent of GDP, it is roughly in line with other fully developed economies whose internal economies are preeminent. And it’s not as if exports have been carrying the economy along anyway. Growth has averaged 5.6 per cent annually for 5 years, a fraction of the pre-crisis pace. At the same time, the manufacturing sector accounts for 12 per cent of GDP, a share that has been in decline for decades. True, there are linkages from these sectors that extend into broader parts of the economy, but even so, the currency hike is not having the negative effects that many smaller economies would be feeling.

So where is the US growth coming from? It’s actually the internal economy that’s generating the big numbers, and it’s occurring in spite of the persistent and pervasive weakness in the rest of the world. Moreover, the indicators generally remain strong, there is abundant evidence of pent-up demand and confidence numbers remain in very positive territory. As such, it is hard to see a strong US dollar getting in the way.

Weakness in the rest of the world has actually been a greater concern. But here’s where that story could change: a stronger US dollar suggests that consumers and businesses across the lower 48 are more likely to spend abroad – essentially exporting the US economic revival to the rest of the world. It has also become cheaper for America to invest abroad, another way that US strength is likely to make its way further afield. Sounds good, but can this occur without undermining the source of growth?

Three reasons suggest that indeed it can. First, US industry has in many respects blazed the trail of globalization. Manufacturing has in general long since developed extensive global operations and supply chains that have built a natural hedge into the business model; imported content is a greater share of final products, and as such, a stronger dollar reduces a significant share of input costs. Second, US industry is dealing with a deluge of orders, but little spare productive capacity. Utilization rates are virtually at pre-crisis peak levels, and in certain cases, are well above those levels. Greater imported content or investment in foreign production would actually relieve this critical domestic shortage. Third, the boost to foreign output would eventually end up raising foreign demand for US goods.

Not satisfied? A fourth factor seals the deal. If a rush of imports and outbound investments throws trade and capital account balances off rapidly, then the dollar would assume the role of shock absorber, weakening once again to offset the shift. The floating currency assures that leakages would have limits.

The bottom line? Far from economy-killer, the strong US dollar may actually be the piece of the global growth puzzle that has until now been missing. If it truly completes the bridge from the US economy to the rest of the world, we should be seeing the evidence very soon.


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