Quantitative easing aka printing money was started by the EBC on Monday, 9th of March. Mr Draghi wants to achieve the same results of QE as the United States in the past. Namely, he wants to finally pull the European economy out of stagnation by increasing inflation, economic growth and decreasing unemployment. Despite all the controversies around the quantitative easing itself, one needs to admit that some action was necessary. However, one of the effects of this policy was an even further depreciation of the Euro, particularly against the Dollar.
Although for the majority of us more expensive dollar will result in thinking twice before going on holiday to the States, it does influence our lives on much more levels. In fact, the impact of the appreciation of this global currency is so huge that the economists argue about its actual results. I will approach the topic from two broad perspectives: American and international.
A strong dollar has always been a good thing for the United States
“A strong dollar has always been a good thing for the United States”. That was the position taken by the Treasury Secretary Jacob J. Lew. Raising more than 19% against Euro is an indication of it.
Which sectors are affected?
Looking at the situation from the macro perspective, a stronger dollar benefits the population as the imported products will become more accessible and hence affordable. On the other hand, it will put pressure on the domestic companies due to the increased competition. However, in a strong economy, which the American one undoubtedly is, the net balance should be positive (profits from increased trade will overshadow the costs to the domestic companies).
There are two sides to every coin…
Being still at a macro perspective, it needs to be noted that strong US dollar is not only the effect of a good condition of the American economy, but also the effect of weaker foreign currencies, such as Euro, Japanese yen, Australian and Canadian dollars. Taking this fact into account, one may argue that an American dollar is overestimated and it might result in its significant depreciation if the condition on the global market will change abruptly in the future.
Moreover, strong currency is usually an indicator of a strong economy, which drives up the values of American stocks and bonds. That actually is the case if we take a look at S&P500, an index that is constantly beating its record highs over the last year. Strong dollar is a good indicator for foreign-funded American companies. Those global companies are setting up factories and buying source materials outside the US as well. Although it might be a good strategy to expand the operations of the American companies abroad, it needs to be noted that 40% of the revenue of S&P500 companies comes from the foreign markets. Strong dollar and stagnation on foreign markets may result in decreased demand on American products, which will hurt American economy. However, for smaller exporting companies, a strong dollar is a definition of bad news as the importers cannot afford as many goods as a weaker dollar.
Watch out emerging markets
But the appreciating dollar is horrifying news mostly to emerging markets. The Bank for International Settlements estimated that since the end of the financial crisis, international banks have increased giving cross-border loans to emerging markets to an astonishing figure of $3.1 trillion. Because most of this debt is denominated in dollars, the weakening of the domestic currency may reduce the creditworthiness of the country itself.
Furthermore, the majority of international transactions are being realized in American dollars. All the natural resources are traded in dollars. Although the drop in petrol prices was visible in the past months due to the decline in oil prices, it will be even more significant if it weren’t for a strong dollar. The same goes for natural gas or coal.
Unless you are planning on going to the US in summer or your country has significant debt denominated in US dollars, you can sleep safe for now. Of course, you will feel some secondary effects of strong dollar in your everyday life in ‘not-so-cheap’ oil and gas. But I guess this is the dollar’s privilege of being a global currency…