How the Strong Dollar Impacts the Exporter
Posted on November 9, 2022
In the last year, we have steadily seen a strong US dollar in the global economy, which is good for many, including international travelers and importers. On the other hand, a strong US dollar can be challenging for many exporters in the US and ND.
The dollar is described as "strong" when its value rises above other currencies in the foreign exchange markets. Essentially, you can buy more with a US dollar than in other currencies. The US dollar keeps getting stronger because of the increasing interest rates, global uncertainties, including geopolitical issues and inflation, are all contributors. These growing rates (more than 14% from fall of 2021) attract investors, especially international ones, to purchase or hold US currency and assets (which cost US dollars to buy), thus, driving up the demand. A demand that has now reached a 20-year high.
The benefits of a strong dollar are definitely favorable for US travelers abroad, and expatriates as local prices for goods are less expensive in other countries. Importers also enjoy the same benefit with their dollar going further as the same goods are often less expensive as other currencies fall against the dollar.
Conversely, some challenges exist with a dollar so strong. If the US dollar is strong, that means that the cost of US items for international buyers has now become more expensive or in some cases, unaffordable. The exchange rate is very high for international buyers getting paid in their home currency. Items priced in the US dollar are essentially too expensive for foreign buyers. US exporters can struggle when the dollar is strong because US export products are less competitive and often less likely to achieve sales. Some economists even liken the strong dollar to a massive tax on purchasing US goods by foreign buyers. International consumers will often choose local alternatives rather than paying higher prices for US goods. US companies that do business abroad are also hurting as their foreign income will likely be down.
Large commodities are quoted in USD prices, including oil, wheat and metals. So, a stronger dollar means the base price for these items are higher across all markets. Because these basic items are now more expensive, cost of living, especially for emerging economies, has also increased.
A high-value dollar not only impacts the movement of goods globally, but it has trickle-down impacts that can be challenging, especially for small and medium businesses that are unable to insulate through other financial means. This could mean a slowing of production in the light of fewer sales, employment reduction in an already challenging workforce situation, and taking an even lower cut of the profits. These items are compounded when considering the high shipping cost and other expenses incurred in a global business environment.
The US dollar is likely to remain strong for the foreseeable future, so some countries attempt to intervene in foreign exchange markets to boost their own currencies by selling their own USD assets. These efforts can slow down the decrease of a country's own currency but will not likely temper the upward trend of the dollar.
Overall, many economic theories predict that the fluctuations will revert back to a more "normal" rate as demand for less expensive goods from foreign countries are imported and thus the prices on those goods can rise. But until then, there will still be tough decisions to be made as many exporters are challenged by the strong US dollar.
EconoFact: Global Repercussions of a Stong Dollar
Franklin Templeton: Quick Thoughts: Why the US Dollar Matters
Investopedia: Strong Dollar: Advantages and Disadvantages