The Effects of the Falling Dollar on US Trading Partners and US Consumers

#dollar #inflation #recession #exports #commodities #growth


The US is falling for the right reasons, that good news for stocks and the American consumers” — Paul Ebeling

A weaker USD will boost earnings in dollar terms, which is good news for US-based exporters, but USD weakness also reflects “extra easy financial conditions,” which are Bullish for equities both in the US and abroad, including emerging markets plus:

A fall in the value of the USD could contribute to inflationary pressures. This may happen for a number of reasons, as follows:

  1. Import prices will rise causing a degree of imported inflation
  2. The rise in aggregate demand from cheaper exports
  3. The fall in the value of the USD may reduce the incentives for firms to cut costs because they get an ‘easy’ improvement in competitiveness. Therefore, a fall in the dollar could harm long-term competitiveness.

As the USD falls in value, the EUR and JPY will appreciate. This will have the effect of causing inflation will be lower in the EU because of the following:

  1. Imported goods will be cheaper (Most raw commodities are priced in USDs)
  2. AD (anti-dumping) will be lower or increase at a slower rate.
  3. Manufacturers have increased incentives to cut costs. Therefore a devaluation will help reduce EU inflation. This could cause a recession but evidence suggest EU growth is more resilient and the ECB have said a cut in interest rates is not necessary at the moment.

Resident economist Bruce WD Barren reminds us that, plus all the above, simply that a fall in the value of the USD will likely overall benefit the US Consumer

  1. Import prices will rise causing a degree of imported inflation, not detrimental to Americans.
  2. The rise in overall demand from cheaper exports helps building US employment.
  3. And so, a falling dollar would create and encourage greater domestic competitiveness for foreign companies would want to invest more heavily  in the US causing more US companies to modernize their facilities in order to meet their competitive landscape.

Here at HeffX-LTN we are calling the Greenback to fall to about 76 Vs its peers. Stay tuned…

Have a healthy weekend, Keep the Faith!