King Dollar Is Back, Which Means …
WHY YOU SHOULD CARE
What goes up here means something must come down elsewhere.
By Simon Constable
Simonomics: A regular look at the global economy from a former staff columnist at The Wall Street Journal.
Ah, it’s a delicious feeling. You’re sitting down in a café in Provence and you can finally supersize that croissant and café au lait because your dollar is no longer a joke. In fact, King Dollar, as we like to call it, is on a roll, up 33 percent in four years against a basket of currencies.
But anyone with a passport can take advantage of a strong dollar on the little stuff. It’s the bold, the brave, the people and firms big and small that play world currencies that are furiously trying to get a real edge — especially now that all signs point to an ever stronger U.S. greenback. The American economy is (finally) growing fast enough for the Federal Reserve to start thinking about raising interest rates, while many countries are going the other way. Even as we speak, investors are snapping up dollars and dumping other currencies, and there’s no end in sight. “The dollar will continue to strengthen because there are some extremely large differences in monetary policy between the U.S. and the rest of the world,” explains Steven Wieting, global chief investment strategist at Citi Private Bank in New York.
We know that’s good if you’re an American consumer, but it’s also good for retailers. Here’s how: The higher value of the dollar means U.S. retailers will be able to buy more foreign goods to sell to Americans than they did a year ago for the same money. Or, put another way, imported knickknacks will be cheaper than they were. That’s a huge deal, because U.S. consumers make up about two-thirds of the country’s economy and have traditionally had a voracious appetite for, well, stuff — useful (that new robotic vacuum) or otherwise (a dedicated banana slicer). After all, cheap foreign goods are catnip to Americans.
There will be economic losers as well — most other countries, in fact, until growth in the U.S. can drag the world economy along.
Let’s hope that continues. Since the U.S. and its allies won World War II, the American economy has acted as the main locomotive that has pulled the world economy along. That engine runs faster when the consumer is hungry and, Wieting says, “the world wants the American consumer back.” This likely-to-happen consumer-led spending spree will eventually attract more capital to the U.S. and accelerate its economy, writes David Ranson, head of research at HCWE, a Cambria, California-based economics consulting firm. A stronger economy, in turn, will lead to an even stronger dollar.
But there will be economic losers as well — most other countries, actually, at least until growth in the U.S. can drag the world economy along. And parts of Europe may have a lot to lose. Ranson, who’s never been a fan of devaluing a currency to spur growth, warns that’s exactly what the European Central Bank has effectively been doing with the euro. “The currency instability is damaging to the economy,” he says, adding that some investors will pull out their capital and place it in more stable currencies, like the dollar. Ranson also cites evidence that currency devaluation leads to lower growth; the bigger the devaluation, the lower the growth. That, of course, doesn’t bode well for the devaluation of China’s currency this week.
As for the rest of the world? Japan and other developed economies like Canada and Australia will almost certainly have a better time of things than those of so-called emerging markets like Chile or Colombia, or frontier markets like Vietnam or Morocco. These are economies that are significantly less developed and are particularly vulnerable to people and institutions pushing capital out to other countries. In fact, as Ranson points to declining stock indexes for both emerging and frontier stock markets, that outflow may already be happening.