Potential Problems with the Mighty Dollar
It seems that we live in a non-Goldilocks world these days. Take the US dollar, for example. We find ourselves constantly searching for that “just right� spot in between too weak to buy anything at home and too strong to kill demand for our exports. With the current run-up in King Dollar, Uncle Sam is definitely on the strong side of that equation and problems are likely to occur as a result. Yet the difficulties created at home are nothing compared to the typhoon of consequences that are likely to hit in foreign lands.
Because of its status as one of the primary global reserve currencies, along with the Euro, there are a lot of dollars floating around everywhere. In numerous countries, US currency is preferred over the local scrip and this leads, in many instances, to contracts written for payment in dollars. When exchange rates are steady, this is not much of a problem, but when the dollar starts elevating in value, local residents have trouble earning enough in the local economy to buy the number of dollars necessary to pay for their dollar-denominated mortgage or business loan. Spreads such as these have brought many economies to their knees in past instances and this new era of rising dollar values is likely to create the same sorts of problems in stocks and other instruments of cross-border finance once again.
Back at home, large US companies often expect 45% or more of their revenue to come from overseas markets. A strong dollar kills export demand by making US goods very expensive to those who have nondollar denominated incomes. This in turn leads to lack of sales at home, followed by layoffs at the factory gate. Unemployed workers then cut back on their spending, which starts to harm the retail sector of the economy. The malaise slowly spreads to overseas manufacturers as their American customers stop buying—which in turn aggravates the flow of dollars into their country that are needed to pay for all those US dollar loans floating around.
This creates social unrest and instability, which causes the wealthy job producers to cash out their holdings and move to safe zones where their wealth will be protected even if it means throwing thousands of people out of work when their factory closes. While this may illustrate some of the dangers of an extra-strong dollar, it is not that easy to avoid the problem since other countries engage in deliberate efforts to weaken their own currencies in order to attract US cash into their economies.
Jeff Ramson is the CEO of PCG Advisory Group and an authority within the Investor Relations industry.