NEW YORK: The strong US dollar, boosted further by the Federal Reserve’s decision to raise interest rates, could pose challenges to President-elect Donald Trump’s economic agenda.
The greenback shot to fresh multi-year highs against the euro and other currencies Thursday following the Fed’s move Wednesday to increase the benchmark lending rate and its signal about additional rate increases in 2017.
The US currency already had been on an upward trajectory after Trump’s election, amid expectations he will push policies that could unleash higher growth and inflation, leading to more interest rate hikes.
Many analysts expect the dollar to continue to rise, after gaining five percent against a basket of six currencies since Trump’s election.
“We would expect the dollar to continue to strengthen,” said Wells Fargo analyst Eric Viloria. The Fed’s plans to raise rates further contrasts with “what a lot of other major central banks are doing.”
Trump himself has warned of the negative effects of a strong dollar, saying during the campaign that “it sounds better to have a strong dollar than it actually is.”
“If we raise interest rates and the dollar gets too strong, we’re going to have some major problems,” Trump told CNBC in May.
Investors flock to markets that have higher interest rates seeking better returns, which creates more demand for dollars.
Pros and cons
A strong currency has traditionally been seen as a sign of economic might among nations. But beyond that, there are some economic benefits. Consumers get better prices on everything from imported clothing and toys to luxury cars, keeping inflation low.
But while the US remains a strongly consumer-oriented economy, data show exports are becoming more important to the economy.
Exports of goods and services as a percentage of US gross domestic product rose to 12.6 percent in 2015 from 9.1 percent in 2002, according to the World Bank.
“The US has been exporting more and more,” said economist Joe Naroff. “There is greater sensitivity of the economy to the strong dollar now than it was five or 10 years ago.”
A wide swathe of the US economy now depends on exports, including farmers in the midwest, steel companies in Ohio and chemical companies in the Gulf Coast.
All of these sectors already were suffering from the strong dollar, according to Federal Reserve’s “beige book” report on economic conditions released in November. Although it also noted that manufacturers can import raw materials at lower prices.
Trump has vowed an “America First” approach to economic policy, pressuring companies to build and keep factories in the US. Yet a strong dollar will add to the price of US exports, making it harder for them to compete in other markets.
Multinationals get hit
US stocks also have risen sharply since the election on optimism Trump will cut taxes, streamline regulations and boost public works spending, which would lead to higher corporate profits.
Yet, a strong dollar hits multinationals not only by making their goods more costly overseas but by forcing them to convert overseas earnings into dollars at a disadvantageous rate.
Some of these negative impacts will be offset by other Trump pledges, such as a cut in corporate taxes.
But “tax reform tends to take a long time,” said Aidan Garrib, global macro strategist at Pavilion Financial.
And Garrib predicted the strong dollar would hit US companies even more than in 2014, because the greenback is even higher now.
“For sure, the strong dollar will hurt,” he said.