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August 30, 2012

A Strong Dollar Is Not Good News for Exporters

By James Picerno of The Capital Speculator

It’s become fashionable in this election cycle in some circles to promote the idea of a strong dollar as a key part of the solution to the economic ills that plague the U.S. But simple “solutions” in economics aren’t always what they seem. That's a caveat worth considering when it comes to America’s growing exports and how it relates to the value of the dollar. Arguing that America should have a strong dollar may sound good in a political speech, but the details can be messy.

It’s well established that changes in export levels tend to be inversely related to currency value, and for a rather obvious reason: domestic goods and services are less expensive in foreign markets when the home currency’s value falls. When prices decline, consumption usually rises. But there’s no free lunch here. A weaker currency also translates into higher prices for imports. That’s a key issue for the U.S., which is dependent on crude oil imports in rather large quantities--nearly 11.4 million barrels a day in 2011.

Nonetheless, it’s narrow-minded to talk about a strong dollar and ignore the fact that U.S. exports have increased sharply in recent years, in part thanks to a weaker greenback. Four years after the Great Recession ended, American exports are up 44% through June 2012, according to Census Bureau data. In 2010, exports’ share of U.S. GDP was 13%, up from 11% the year before, the World Bank reports. Roughly 10 million full-time jobs are directly related to exports, based on 2008 data, the International Trade Administration advises, which equates with nearly 7% of total employment.

Exports, in short, are big business, and getting bigger. A recent Brookings Institution report notes:
U.S. export sales grew by more than 11 percent in 2010 in real terms, the fastest growth since 1997. In terms of job creation, the number of U.S. total export-supported jobs increased by almost 6 percent in 2010, even as the overall economy was still losing jobs.
Unsurprisingly, the data show that a weaker (stronger) dollar is linked with higher (lower) exports, as the chart below shows. It’s not a perfect relationship, but nothing ever is in macroeconomics. What the relationship implies is that a stronger dollar at some point will trim exports and, perhaps, jobs, and vice versa. Funny how that risk is never discussed by the folks who bang the table for a strong dollar.


I don’t want to suggest that a mindless policy of weakening the dollar is an easy solution either. There are limits to what a lower dollar can deliver in terms of higher exports and new jobs. Let’s not forget the costs in terms of higher prices for imports via a weaker dollar. The great question is deciding where the sweet spot is for America? At what level does the dollar's value maximize exports/jobs without incurring a net loss for the economy in terms of higher import prices? That’s worth modeling and discussing, but it's a two-way street.

Discussing a strong dollar without talking about the potential impact on exports is, at best, a naive view of international trade. The next time someone tells you that we need a "strong dollar" policy, ask them: "Why?" You might follow up with: "How strong?" And the zinger: "What would a 'strong dollar' policy mean for exports?"

About the Author - James Picerno is a veteran financial journalist since the early 1990s at Bloomberg, Dow Jones, etc. before becoming an independent writer/analyst/consultant in 2008.  James is also the author of Dynamic Asset Allocation (Bloomberg Financial, 2010) and he writes at The Capital Speculator(EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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