Rising U.S. Dollar Could Put a Damper on Manufacturing Exports

Is the rising value of the U.S. dollar a good thing for American manufacturing, or does it make the sector less competitive? On the face of it, one might think a strong dollar is a positive thing. Strength is good. Higher value is good. But that's not necessarily the case in the world of manufacturing trade.

"A rising dollar is bad for manufacturing," Robert E. Scott of the Economic Policy Institute (EPI) told IMT. "It acts like a tax on all U.S. exports and a subsidy to imports." Scott blames the rising dollar on currency manipulation by other nations and on the U.S. government's "policy of malign neglect of the dollar, which has decimated U.S. manufacturing." He said that "ending currency manipulation would reduce the U.S. trade deficit by $200 billion to $500 billion per year and support 1 to 5 million new jobs."

The strength of the dollar is in part a result of the health of the U.S. economy, at least compared to the rest of the world, according to The Economist: "Bad mortgage debts have been cleaned out of banks. The housing market is recovering. Jobs are growing steadily." The article estimates the American economy will grow by 2.7 percent in 2014, which it admits "is hardly a boom. But other big rich economies, such as Japan and Britain, cannot hope to do nearly as well. And the euro zone is still in recession."

Howard Schneider of The Washington Post wrote in June that if the dollar continues to rise, "it makes U.S. products - from soybeans to trucks and airplanes - more expensive overseas at a time when the Obama administration is banking on international sales of American goods to generate jobs." However, Schneider writes that exchange rates don't necessarily have "a one-to-one effect" on the prices of final goods. "Many firms rely on imported parts and other inputs -- which get cheaper when the dollar is stronger, offsetting the impact of a rise in the value of the currency."

Steve Rothwell of the Associated Press writes that technology manufacturers "have become increasingly reliant on overseas sales, and a stronger dollar reduces the value of their overseas earnings." About 56 percent of tech revenues come from outside the U.S., he says. Oracle reported that the rising dollar reduced its earnings by 2 percent in a recent period. A higher dollar also increases prices for commodities, which are priced in dollars on the global market, affecting demand.

Manufacturers that rely less on exports for sales might be in a better position, however. Rothwell writes that smaller companies, for example, "make fewer sales overseas than large multinationals, so they aren't affected as much by the strengthening dollar." A rising dollar can make imports to the U.S. cheaper, so a business can save if some of its manufacturing inputs come from overseas. If a company's primary markets are domestic, the strong dollar could be a help and could point to overseas sourcing as a fruitful strategy.

How far will the rising dollar go? Analysts from Deutsche Bank, Rothwell says, "forecast that the dollar will strengthen to $1.20 against the euro by the end of the year, or about 7 percent, from its current level of $1.29. By the end of next year, they see the dollar strengthening to $1.15 against the euro." George Magnus, an economist writing for Financial Times, says the dollar could continue to rise into 2015, "marking a big shift in the investment environment."

The Economist speculates that the dollar is unlikely to see the run-up it enjoyed during the 1990s: "For now a fitful upwards grind of 5 to 7 percent against the other major currencies might well be the limit."

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