The idea that the United States should strive to keep the value of the dollar high in terms of its exchange rate with foreign currencies seems, on its face, to make a lot of sense. A strong dollar tends to reflect a strengthening economy. It can protect against inflation, and give U.S. companies and consumers more buying power abroad. Who could possibly be against a strong dollar?
Well, any American business that wants to sell its products overseas has an interest in making sure the greenback doesn’t put on too much muscle. An overly strong dollar can cause the price of U.S. exports to climb, making it difficult to sell into overseas markets and worsening the existing trade deficit.
Right now, the U.S. dollar is surging relative to almost all other major foreign currencies. In September, it gained 3.21 percent against the Japanese Yen, 2.44 percent against the Euro, and 1.51 percent against the British Pound. Numbers for the full third quarter of 2014 are even higher, with the dollar up more than 8 percent against the Yen and Euro, and 5.5 percent against the Pound.
Foreign exchange analysts tell The Wall Street Journal that they expect the trend to continue through 2015.
Part of the reason the U.S. dollar remains strong is that governments and financial institutions around the world use it as a “reserve currency.” Among other things, it allows foreign central banks to manipulate the value of their own currency by purchasing it in exchange for dollars.
For the U.S., the demand for dollars overseas has some benefits, such as allowing the Treasury to borrow more cheaply than other countries can. However, that demand also keeps the dollar’s value high relative to other currencies, which makes U.S. exports more expensive.
U.S. officials have long said that they remain committed to keeping the dollar strong. Speaking at an event in Washington yesterday, Treasury Secretary Jack Lew made clear that he is no exception, saying, “Like my predecessors, I believe a strong dollar is good for the United States.”
Not all economists agree. In a speech Tuesday, William C. Dudley, president of the Federal Reserve Bank of New York, said that the strength of the dollar is keeping U.S. inflation below levels that economists believe is healthy for the economy.
Jared Bernstein, a senior fellow with the Center on Budget and Policy Priorities in Washington, has urged the U.S. to end its focus on protecting the dollar’s status as the world’s reserve currency, in large part because suppressing demand for U.S. exports drives down GDP and harms job creation. “The persistent U.S. trade deficit is a real barrier to full employment,” he wrote on his blog Tuesday.
The strong dollar penalty faced by U.S. exporters may only worsen as the U.S. economy picks up steam at the same time that other major world economies continue to struggle. And when manufacturers can’t export their goods, they don’t hire new workers to make them.
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