The American dollar is now hitting new 12 year highs. This has been the fastest rise in 40 years. The major currencies of the world continue to sink against the United States dollar (USD). As world commodities are priced in dollars, the rapid decent in their cost is creating new misery in developing nations. Many of these countries are overly dependent on these industrial raw materials. World trade is attempting to readjust to a strong dollar with some unexpected results.
Part of the reason for the return of the United States dollar is a reflection of the stronger American economy in comparison to the slower growth in Europe and parts of East Asia as well as Latin America. The end of quantitative easing and the termination of forcing lower interest rates in the United States, is another explanation for the 14% surge in the American dollar since the beginning of 2015. Although the dollar is still under stress for the huge debt run up by consumers, businesses and the government, in comparison to other major world currencies it is doing rather well for the moment.
The rapidly depreciating value in many of the other world currencies is a result of a conscious effort by central banks to devalue their domestic money. It is an attempt to stimulate economic growth and exports. The problem is almost everybody is doing it. If one country gains a temporary advantage through lower interest rates or quantitative easing, it is quickly negated by other nations engaged in the same monetary and fiscal policies.
The Euro which is now plunging in value thanks to lower interest rates and quantitative easing, saw the exchange rate with USD approaching parity. A low of $1.0457 was witnessed in Asian markets before a slight rebound to $1.0536. These are the lowest rates since January of 2003 and have not hit bottom yet. In fact as the United States monetary policy continues to diverge with Europe, expect the Euro to continue to drop in value.
The British pound which was worth $1.70 USD just 6 months ago, has now gone below the benchmark of $1.50 USD, coming in at $1.48 USD and still dropping. Elsewhere in Europe for example the Swiss franc, has departed from being worth in excess of $1.25 USD as recently as 2011, to less than a $1.00 USD now. The same phenomena is being reported in Sweden. Last year, the Swedish krona was worth over $0.15 USD, it is now coming in at $0.12 USD and due to fall even further. The Danish krone has dipped even deeper in value. Worth in excess of $0.18 USD just a few months ago, it is now at $0.14 USD.
In Russia, the currency is in practical collapse against the American dollar. The ruble has lost 50% of its value. Last year a ruble was worth over $0.03 USD, now it is worth $0.016 and due to drop even more as oil and other commodities continue to decline in price.
In Japan, the United States dollar has increased in value from 119.54 yen in February to 121.18 yen in March. As recently as June of 2013, the yen was valued at 100 in the exchange rate with the dollar. The massive stimulus, low rates of interest and quantitative easing along with high debt levels, are taking the yen down in value at a rapid pace.
An Australian dollar was worth more than an American dollar as recently as 2013. It is now worth $0.76 USD and is still dropping. Like Russia, the Australian economy is quite dependent on the export of commodities. The slowdown in growth in China is having a serious impact on Australia. The same is the case with the Indian rupee despite faster economic growth there. It has gone from being worth $0.020 USD in 2012 to $0.016 now.
In South Africa, the rand is moving down in value steadily. In 2012 it almost always stayed above $0.12 USD. Now it has declined to $0.081 USD. It is a 30% reduction that is not helped by the diminution in precious metals, like gold and platinum. These commodities make up an substantial amount of the country’s foreign exchange earnings.
In the Americas, the pattern has been much the same. In North America, Canada despite a relatively good economy has nonetheless watched the value of the Canadian dollar erode. In basic parity with the American dollar in 2013, it has crumbled to just $0.78 USD, a rate that has not been around in years.
Mexico has also seen the value of the peso drop from over $0.08 USD to $0.065 USD, in less than 2 years. The erosion in Brazil has been even more dramatic. As recently as 2012, the Brazilian real was worth $0.06 USD. Since then it has plunged 50% in value, to the present exchange rate of $0.31 USD. Economic stagnation and corruption in Brazil have definitely helped take a toll on the real against the strengthening United States dollar, but it does not explain the whole reason to what is happening.
The drop in the value of all these currencies will make exports to the United States cheaper, as will be the case with all the other major currencies of the world. Of course this flood of imports into the United States will have political as well as economic consequences. The countries that have a good trade relationship with the United States, will be able to stimulate their economies somewhat by increasing sales of products and services to Americans. However, there is a limit to how much can be absorbed even in a sizable economy like the United States.
Contrary to what might have been expected, production of crude in the United States continues to expand. This is leading to even lower prices and a growing concern that there will soon be no place to store all this surplus oil. Futures in the United States have continued to slide reaching $43.57 USD a barrel after another 2.8% decline. This lower price for American priced oil known as WTI (West Texas Intermediate), will necessarily force the international priced Brent oil to a lower value as well.
Although there have been cuts in the number of oil drilling rigs in the United States, these have been made in the least productive areas of extraction. This will mean at least in the short term, that production will continue to increase. Of course, once prices head below $40.00 USD there will no longer by an economic incentive to continue to expand output, despite recent increased cost savings in fracking technology.
Of course, there are disadvantages to a strong dollar for the United States in some respects. American companies that do business overseas will find that there will be fewer sales and far less orders. This is the result of American goods and services becoming more expensive abroad when denominated in depreciating foreign currencies.
A stronger dollar will encourage Americans to spend more money abroad in travel and in overseas purchases. It will also promote more investment by individual Americans and corporations in foreign countries. The boom will last as long as the dollar retains the increased value.
United States exports will take a hit as prices for American products from agriculture, capital goods, consumer goods, automobiles and aircraft components all become more expensive to foreign buyers. This will force a further decline in various sectors of manufacturing that was benefiting from lower energy costs. This will result in less hiring in this segment of the economy which will overall hurt growth, as well as contribute to higher unemployment. An additional concern is that most of the jobs that will be lost are in industries that traditionally provide better compensation, than other sectors of the economy.
As aforementioned, most commodities are priced in dollars. Those countries dependent on the extraction and export of natural resources will not see any real economic growth until there is a recovery in the commodities market. This will be less likely, as long as the dollar remains strong.
There is already a surge in foreign investment in the United States as a result of a strong economy and expanding stock market. As low as interest rates are for American equities and bonds, they are still a better option than what is available overseas in most cases.
If the Federal Reserve, which is the central bank of the United States finally raises interest rates for the first time in almost a decade this summer, a torrent of foreign money will soon arrive. This in turn will have an inflationary effect in the United States. If there is a tick up in rates it will not be too large because it would have a detrimental effect on stocks and the United States economy as a whole. The nation has become addicted to low rates and easy money. It makes the increasing indebtedness more affordable.
The United States government is already spending well over $200 billion USD just to pay the interest on the national debt. This is due to rise to over $800 billion USD by 2025. It is another reason why high interest rates in the United States are unlikely, unless inflation gets out of hand. Servicing the debt will become much more difficult, during a period of higher rates and eventually impossible.
The strong American dollar is a recent phenomena that is dependent on a growing United States economy and a world of depreciating currencies. This monetary phase unlike what many experts are predicting, cannot and will not last very long. Although it may seem like this is the new monetary norm, it is based on a set of international circumstances that are unusual and therefore will be short lived. The American stock market will eventually retrench and a recession will arrive shortly after. Then the United States will be engaged in lowering interest rates again, to reduce the value of the dollar and to stimulate growth once more.