There’s a lot going on at home and in the world these days. But the rising value of the dollar sticks out for economists.
Yes, there’s news like U.S. Sen. Ted Cruz’s announcement that he is throwing his hat into the Republican presidential contest. Yes, there’s news of Benjamin Netenyahu’s election as the next prime minister of Israel.
And my current favorite, South Koreans activists want to send thousands of DVDs of the movie “The Interview” via balloons to North Korea – a foolproof method of getting rid of President-for-Life Kim Jong-un.
Among the hubbub, you may have lost track of the U.S. dollar’s recent rapid appreciation against other currencies – for example, gaining 25 percent against the euro – in past six months.
So what does it mean?
Well, for one, it might be a good year to consider foreign travel. Or replace your foreign skis or tennis racket.
But this effects us in other ways, as well.
First, it will lead to a worsening trade balance, which, depending on how you want to look at it, is good or bad.
It is bad for sectors that export as the price of these exports rise sharply, depending on the amount of exchange rate “pass through” of course.
This is particularly important given recent price shocks in oil markets, and it is ominous for workers in the energy sector.
It’s good for buyers of foreign goods and the countries that produce them. The American economy needs a healthy rest of the world as a market for our exports, all roughly $1.5 trillion of them.
The dollar’s rise also helps keep our inflation in check. Cheaper imported goods – everything from tennis rackets to a room at the Savoy Hotel in London – ensure that the prices of many of the goods we buy remain low.
And that’s good news for the Fed. With inflation low, the Fed is under less pressure to raise interest rates – something everyone expects soon, but now there’s a slight cloud of uncertainty as to when exactly.
In fact, the Fed may be less willing to raise rates precisely because the dollar has appreciated. In fact, much of the rise in the dollar has been caused by the European Central Bank’s decision, finally, to do some quantitative easing.
As mentioned above, a stronger dollar hurts exports, and, with the U.S. economy still staggering a bit, it doesn’t need another shock to pull it back into the mire.
The Fed’s potential delay impacted us in other ways as well, particularly in financial markets, cheap money buoys stock markets.
Subtle signals from the Fed’s last policy meeting pushed stock markets and the dollar up in one fell swoop.
And nudged interest rates back down.
So now we can all get back to the business of buying stuff and pondering balloons laden with DVDs floating to North Korea.
sonora_t@fortlewis.edu. Robert “Tino” Sonora is a professor of economics at Fort Lewis College and the director of the Office of Business and Economic Research at Fort Lewis College.
