Georgetown University’s Newspaper of Record since 1920

The Hoya

Georgetown University’s Newspaper of Record since 1920

The Hoya

Georgetown University’s Newspaper of Record since 1920

The Hoya

SULLIVAN: Strong Dollar Helps Students, Hurts Countries

By almost every indicator, the American economy is seeing the other side of the Great Recession. Consumer confidence, S&P 500 prices, exports and even employment have all restored or have almost reached their pre-Recession highs.

Despite how rosy things look in the United States, other countries aren’t faring so well. Economists predict another slowdown in China’s economic growth, Europe has remained relatively stagnant (particularly in the economic engines of France and Germany), and energy export-dependent countries such as Russia, Nigeria and Venezuela have increasingly struggled with the plummeting price of oil.

All of these factors (and more) contribute to this week’s topic: the surge in the value of the dollar against other currencies.

At the time this article is going to print, one euro is equal to 1.07 dollars. This equivalency is the closest the two currencies have come since 2001.

The euro isn’t the only benchmark for the strength of the dollar, but between its performance and that of currencies like the yen and the yuan, the dollar is without a doubt a stronger currency now than it was at any point in the last 10 years.

While it may seem that a 22 percent increase in the last year in the value of the dollar is colossal, the size of the move is exaggerated by market forces. The sluggish economies have meant stagnant currencies globally, driving investors toward dollar-denominated assets that they can reasonably assume will appreciate.

Interestingly, the dollar isn’t the only currency to which investors are flocking. In an interview with Bloomberg Television, the head of the Swiss National Bank recently declared the franc to be “overvalued” and is engaging in efforts to increase inflation, devalue the currency and keep interest rates at record lows.

With global markets faltering, currencies like these two, which are marginally strong, will appear even more so.

The rise in the strength of the dollar comes on the heels of the Fed indicating that it intends to raise interest rates for the first time since 2006. The indication was primarily from semantics and word choice in their quarterly meetings, but nonetheless, a rise in the interest rates will strengthen the dollar, pushing the value even higher.

There are various implications of a strong dollar. First, as nearly everyone who has taken an economics class can tell you, American exports become more expensive in the global market. While exports will become more expensive abroad as the dollar strengthens, this trend isn’t as salient as the one in this economic environment.

Given rising incomes, consumer confidence and lower fuel and transportation costs, there is greater domestic demand for products produced domestically. The higher demand within the United States will help to offset the decreased consumption abroad.

The other major consideration with a strengthening dollar is the effect on dollar borrowers. For American investors, and those in markets that are sophisticated enough to contain firms that have both liabilities and revenues or assets in dollars, this isn’t a cause for concern. The trouble comes from investors (individual, institutional or sovereign) whose currencies have not appreciated to the same degree.

For example, if you are a firm in the Eurozone that has borrowed in dollars, you have seen, relative to your home currency, the euro rise in the value of the debt you owe. The situation is more severe in developing countries. Countries like Turkey, South Africa and Brazil, as well as foreign firms such as Russia’s Gazprom, all use dollar-denominated loans or bonds to finance their budgets and operations. Therefore, when the dollar increases and their own currencies slide, they have smaller tools to tackle larger debts.

The biggest winner here on the Hilltop is Joe Hoya studying abroad. When your fearless columnist was abroad in Madrid in the fall of 2013, it was roughly 1.65 dollars to every euro, meaning I was paying more any time I was in the Eurozone. Now, Joe Hoya is feeling a little bit less of a strain as he travels.

For those students still in the United States, there may seem to be more imported products on the shelves of Safeway and other retailers, as those imports become cheaper relative to American goods.

The other possibility, however, is that with increases in real wages, consumer confidence, etc., purchasers for retailers may opt to stick with domestic versions of products under the assumption that their relatively wealthier, loyal shoppers will be able to afford it.

Sean Sullivan is a senior in the McDonough School of Business. 37TH AND WALL ST appears every month.

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