Coverage: What does a strong U.S. dollar mean?

There is a lot of debate about what a strong U.S. dollar could do or not do for the economy. It’s a boon for many types of investments, but for others, it’s not such great news.

Marilyn Geewax wrote for NPR that a strong dollar could harm foreign investment in the U.S. despite the surge in the economy:

The U.S. economic expansion has been gaining so quickly that foreign investors are paying attention. Many want to open factories and offices that could swell their profits while creating jobs for Americans.

But U.S. growth also has pushed up the value of the dollar, which has surged about 14 percent over the past year relative to other currencies. That makes it more difficult for foreigners to spend their money in the U.S. The dilemma is not lost on the White House.

Commerce Secretary Penny Pritzker said in an interview Monday that on one hand, having a strong currency “is a reflection of the fact the U.S. economy is strong. … So that’s the good news.”

On the other hand, “it would be naive to say the strong dollar isn’t something that some companies are taking into account” and might make land and equipment too expensive here, she said.

The key to overcoming that currency drawback is to be sure foreign investors see the big picture and understand the long-term value of the U.S. market, she said. “Your location decisions are ones made for decades” and should not be based on today’s currency bounces, she noted.

The Reuters story by Wayne Cole said that the economy was strong enough to handle gains in the dollar:

The high U.S. dollar will be something of a drag on U.S. economic growth this year but the economy is strong enough to handle it, a top central banker said on Tuesday.

San Francisco Federal Reserve Bank President John Williams said he still expected the U.S. economy to expand by around 2.5 percent in 2015 even with the dollar high. Williams was addressing an economics conference in Sydney by video link.

He added the rise in the currency was partly due to the easy polices being followed by major central banks in Europe and Japan, which in turn was a positive for global growth and thus the United States.

Treasury Secretary Jack Lew said he was in favor of a strong dollar, Julia Glum wrote for The International Business Times:

The U.S. dollar is stronger now than it has been since the beginning of the Great Recession, according to previous International Business Times reporting. The dollar index, which measures its value against a basket of foreign currencies, was at about 98.2 on Friday morning. A year ago, it was 80.2.

This means American consumers can buy imported goods for lower prices and spend less when traveling abroad, the Washington Post reported. But on the other hand, it makes international consumers pay more for U.S. goods — which overall can hinder the growth of the American economy. It also discourages inflation.

Lew’s comment on the strong dollar was not necessarily a smart move, currency strategist Alan Ruskin told the Financial Times. “He is now going to get quizzed consistently as the dollar strengthens on whether the strong dollar is still good for the U.S.,” he said. “In this instance I assume he was trying to defend a view that U.S. industry leaders should adapt to a stronger currency and implicitly that it is here to stay.”

Neil Irwin wrote for The Boston Globe that emerging economies were threatened, as the dollar grew stronger:

These are all parts of the same story: The soaring value of the US dollar is rippling across the globe. As it rises, it is threatening emerging economies where companies have taken on trillions worth of dollar-based debt in recent years. The dollar rally has been driven by decisions by the Federal Reserve, which begins a two-day policy meeting Tuesday. In fact, anticipation of the Fed meeting, where officials are expected to signal interest rate increases could be near, has driven the dollar even higher in the last couple of weeks.

In effect, as Fed policy makers sit around a mahogany table in Washington to try to guide the US economy toward prosperity, their actions are having outsize, often unpredictable effects across the globe, owing to the dollar’s central role in the global financial system.

Years of low-interest-rate policies from the Fed have encouraged companies in these fast-growing economies to borrow dollars because they could do it more cheaply than if they took out loans in their local currencies, like the Indian rupee or Brazilian real. So they did: By September 2014 there were $9.2 trillion of such dollar loans outside the United States, up 50 percent since 2009, according to the Bank for International Settlements.

It’s clear that a strong U.S. dollar offers some benefits to the global economy but definitely has some drawbacks. Foreign investors moving money to different countries could help counter losses as their borrowing become more expensive.