Strength Hurts – Dollar Stronger Than Ever
Federal Reserve decisions and the global landscape have helped make the dollar stronger than ever. With interest rates being hiked rapidly, investors around the globe want their money to be in dollars instead of other currencies like the euro and yen. Investors also want their money in the “safe haven” that is America as uncertainty is high regarding conflicts like the Russo-Ukrainian war. This has positive and negative effects, but it is important to discuss the manufacturing aspect of this equation.
The current climate is set to hurt domestic manufacturers due to the costs associated with US-made goods. US exports are set to be more expensive due to the strength of the dollar relative to other currencies, and US manufacturers with foreign plants are getting less money per dollar due to the weakness of other currencies compared to the dollar. There is no winning, and it’s expected to affect the earnings of these businesses in the next few weeks. RBC Capital Markets, a Canadian bank, expects the sales of manufacturers like 3M and General Electric to fall by anywhere between 2 to 5 percent due to currency-related issues. This has empowered foreign manufacturers, as their goods are appealing even to the US itself, and it reflects a shift in market power. This doesn’t seem to be the case in the long-term future as the strength of the dollar is expected to decrease for multiple reasons. Central banks around the world are raising their interest rates too, removing one of the key incentives for investors keeping their money in dollar reserves. Additionally, the trade data we saw last week indicates that the strength of the dollar is set to decrease as the trade deficit remains high.
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I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.