Monday, 12 December 2016

A Strong USA Dollar Creates Domestic And International Risks

A strong U.S dollar creates challenges for the USA and other countries. If the U.S dollar strengthens, then goods and services in the USA become more expensive.

a strong usa dollar

The U.S. currency has strengthened 4.3% since the U.S. presidential election on November 8, 2016, approaching a 14-year high. If the U.S. dollar strengthens against another currency, then goods and services in the United States become more expensive for people using those other currencies outside the USA. Therefore, businesses in other countries may buy less American-made goods and services, which is bad for American producers.

The currency headwinds are very real. Because when the dollar is strong, our goods are more expensive overseas. - Meg Whitman, CEO of  Hewlett Packard Enterprise

A strong U.S. dollar creates headaches for countries too. The countries most at risk from a strong dollar are those with hefty dollar-denominated debts. Although the use of foreign exchange reserves can be used to prop up national currencies or pay off debt, doing so gives the appearance that money is fleeing the country. This can lead to "capital flight" as investors follow the money out.

China is one of the countries most at risk. The Chinese yuan has been devaluing against the dollar for the last year-and-a-half. This has caused the government to spend a considerable share of its foreign exchange reserves. A strengthening U.S. dollar will continue to put pressure on China to burn through its remaining reserves even faster. This significantly reduces the financial safety net the country has built up over the last two decades.

There are five other countries, India, South Africa, Indonesia, Turkey and Brazil, that have been deemed to be particularly at risk because of their large current account deficits and dollar-denominated debts. The so-called Fragile Five are not alone. Many emerging markets are saddled with significant dollar-denominated debts too, and do not have abundant foreign exchange reserves to rely upon.

In the ever-changing foreign exchange market, events anywhere in the world, at any point in time, can seriously influence performance. As the dollar's value rises, countries will find it more difficult to repay or refinance their debts, especially as the cost of swapping dollars on the open market rises. U.S. exporters should brace for tough times too. Their goods sold overseas have become more expensive in many places, and their foreign earnings are worth less when translated back into U.S. dollars.

No comments:

Post a Comment