Countries Most Affected By A Strong U.S. Dollar
By Kushal Agarwal
| A | Investors are gaining confidence in the U.S. economy which has been faring well even amidst a global slowdown. Consequently, the U.S. dollar has been getting stronger relative to most major currencies in the world. In this article we will discuss the effect of a strong and rising U.S. dollar on emerging economies like Brazil, India, and China; in oil-exporting countries like Russian and Saudi Arabia, in the eurozone; and at home. |
| B | The U.S. dollar is the most important and trusted currency in the world. Most international trade is conducted in U.S. dollars, so its value has a significant and direct effect on the international trade of most, if not all, countries. Major commodities such as gold and petroleum are quoted in U.S. dollars in the international market. The U.S. dollar is also the foremost reserve currency in the world. It comprises the largest percentage of foreign reserves held by governments and private institutions across the world. In fact, the majority of U.S. bank notes are held outside the United States and by non-residents – such holdings are called eurodollar. |
| C | To track the reasons behind the current rising of the U.S. dollar, we must go back to 2009 when the U.S. Federal Reserve Bank (the Fed) began the largest program of quantitative easing in economic history. The Fed printed money to buy up bonds in an effort to stimulate the recession-deadened economy. It managed to add $3.5 trillion to its balance sheet. This resulted in an excess supply dollars in the international market. |
| D | The money the Fed pumped into the U.S. economy found its way into emerging markets (mostly), to the promise of better growth and higher interest from their fixed-income instruments. The dollar's value thus dropped relative to most currencies in the world. In October 2014, the Fed decided to end the quantitative easing program, shutting of the spigot of dollars. This, coupled with an expectation of a U.S. interest rate hike, has sent the dollar soaring against most currencies. |
| E | A strong U.S. dollar will first and foremost have an impact at home. U.S. consumers can rejoice as imported goods will become cheaper and oil prices will go down--most American will see greater discretionary income. A strong dollar also slows inflation which gives the Fed more leeway to continue with an expansive monetary policy (increasing the supply of money without worrying about inflation in the near term). This is likely to further spur economic growth. |
| F | However, a strong U.S. dollar is a double-edged sword. Just as foreign goods become cheaper at home, American-made goods will become more expensive for the rest of the world. That means some exports will no longer be competitive on the international market. Exports will likely see a dip (lower growth in economies across the world may also contribute to this). A dip in exports will affect U.S. companies who rely on revenue from international markets. Apple (APPL), Procter & Gamble (PG), and Johnson & Johnson (JNJ) are good examples – each depends on international markets for at least 40 percent of yearly revenues. |
| G | In Latin American, emerging economies like Chile, Brazil, and Venezuelawill suffer under a strong U.S. dollar. These countries are commodity exporters. The international markets price commodities in U.S. dollars and a strong dollar will make commodities dearer for other countries. With less demand, the price of commodities will fall across the board. In Chile, the price of copper (which makes up 40 percent of the nation’s exports) has already declined by 10 percent. However, countries that are net importers of oil may be able to make up the difference by saving in oil. As a commodity, oil prices also decrease with a rising dollar. |
| H | In Asia, emerging markets IndiaandChina are net importers of both oil and commodities. As we saw above, economies that import commodities benefit from the cheaper commodity prices brought about by a strong dollar. India and China will also benefit by an increased demand for exported manufactured goods as the rising dollar increases how much U.S. consumers can afford to buy. |
| I | However, China is exposed to $1 trillion of non-bank borrowing (borrowing from non-bank financial institutions). These corporations are going to find it hard to repay the debt as the dollar gets strong because it will take more of the yuan to pay off the same debt. For example, a $1 trillion debt when the U.S. dollar and Chinese yuan exchange rate is 1 to 6 will cost $6 trillion yuan to pay off. However, if the U.S. dollar grows stronger (say 1 dollar to 6.2 yuan), the same debt will then require $6.2 trillion yuan to pay off. It is a grim scenario as China is also dealing with it's own economic slowdown due to a decreasing global demand for Chinese goods. |
| J | Russia and the major oil exporters in the Middle East including Saudi Arabia, Iraq, and Iranare all facing the heat of a strong dollar as it pushes oil prices down. The Organization of Petroleum Exporting Countries (OPEC) has not responded as it normally would by cutting supply. It is hoping that by glutting the market with oil and pushing prices down, it will capture a larger market share. The lower prices will make a huge dent in trade accounts of most oil exporting countries. The currency of these countries will also fall relative to the U.S. dollar. For example, the Russian ruble has already declined in value by over 35 percent relative to the dollar. |
| K | Lastly, countries in the eurozone will also be mostly negatively affected by a strong U.S. dollar. They are going to find it hard to raise prices even after the European Central Bank (ECB) launched a quantitative easing plan earlier this year (the central bank will purchase bonds worth 60 billion euros a month for a total of 720 billion euros in the hope of kickstarting the eurozone's stagnating and deflationary economy). However, a strong U.S. dollar will be good for tourism in Europe as more American, lured by a weak euro, will vacation in Europe. |
| L | The U.S. dollar exerts a great influence on the world economy. With the dollar set to rally through the next few years, many countries will be caught up in the wake. The effect of a strong dollar will differ for countries depending on each nation’s economic structure and policies . |
Ex 4.1 Here are some words and phrases from the text. Translate them into Russian:
| gain confidence (phr) – para A fare (v) – para A consequently (adv) – para A relative to (adj) – para A emerge economies (phr) – para A commodity (n) – para B comprise (v) – para B quantitative easing (phr) – para C recession-deadened economy (phr) – para C balance sheet (phr) – para C pump (v) – para D fixed-income (n) – para D shut (v) – para D spigot (n) – para D hike (n) – para D first and foremost (phr) – para E discretionary income (phr) – para E leeway (n) – para E spur (n) – para E double-edged sword (phr) – para F | dip (n) – para F rely on (v) – para F across the board (phr) – para G bring about (v) – para H borrow (v) – para I repay (v) – para I pay off (v) – para I exchange rate (phr) – para I grim(adj) – para I slowdown(n) – para I due to (prep) – para I push down (v) – para J respond (v) – para J glut (v) – para J capture (v) – para J worth (adj) – para K kickstart (v) – para K stagnate (v) – para K exert influence (phr) – para L catch up (v) – para L |