After Donald Trump’s surprise U.S. election victory and the Republicans’ full control of the Congress, the markets have reacted and the U.S. Dollar (dollar) has been continually surging – catching companies and investors off guard. The new U.S. administration seems to believe that this is a sign of “global confidence in Trumpism”, but there are many concerns for U.S. exporters towards an overly strong exchange rate .
A strong dollar is defined as one that can purchase more foreign currency relative to a weak dollar. This means that U.S. consumers will pay less for imports but foreign consumers will pay more for U.S. exports . This is good for U.S. consumers as the appreciation of the dollar against other currencies makes foreign goods and foreign travel cheaper, both of which American consumers enjoy. However, this negatively affects tourism as the United States becomes a less affordable travel destination .
A second consideration is the impact of a rising dollar on the earnings of U.S. companies with large foreign operations . In 2012, for companies in the S&P 500 that provided foreign sales details, 47% of total sales came from abroad, mainly Europe and Asia. Clearly, a stronger dollar would have a negative effect on net exports produced domestically, thus creating a drag on potential earnings. Interestingly, one can consider that “truly global U.S. –based” companies involved in exports do not produce within the U.S., but rather internationally . The effects of globalization in the past decades have allowed companies the ability to purchase materials and set up factories abroad, which means that the rising dollar does not have a huge negative relationship with production as initially understood . The real issue is when the earnings in foreign currencies are converted back to the domestic currency, as companies will feel the full brunt of the reduced returns.
As an example, Apple, the world’s most valuable company and a company known for their international dominance, faces some of the greatest foreign exchange exposures with 22% of their sales from China and 23% from Europe . In the past quarter, Apple reported its biggest hit to its margins in China, about 3% in revenue growth, due to the weakness of the Chinese RMB against the dollar. Luca Maestri, Apple’s finance chief, has suggested the company has been preparing for further dollar strength but has come to realize that “at some point, the strong dollar becomes the new normal and we need to work with that” .
On the positive side, a higher dollar effectively transfers demand from the U.S. economy to other economies around the world . The U.S. unemployment rate is currently below its 50-year average and is showing signs that it will continually decrease. By contrast, other economies, notably in Japan and emerging Asia countries, would benefit greatly from a boost to their exports as a result of a higher dollar. In the long run, this will develop a stronger and more balanced global economy .
The strong dollar will remain a concern in the coming years as President Trump moves to revive domestic production. As it currently stands, having a stubborn stance for domestic development may harm the U.S. in the long run with reduced export potential; however, the strong exchange rate will be hugely favoured by American consumers. The rise of the dollar in 2016 will have impacts well into 2017, and those impacts should be considered positive on a global scale in the U.S. and around the world .