Effects of a Stronger Dollar

The United States economy is doing well. The Federal Reserve expects to raise interest rates. The price of oil is falling and the dollar is going up against virtually all major currencies. What are the effects of a stronger dollar? The New York Times takes a look at the situation.

The United States economy is doing far better than that of most other advanced countries, achieving a recently revised 5 percent G.D.P. growth in the third quarter. The Federal Reserve is planning to raise interest rates this year, at a time its counterparts in Europe and Japan are pushing toward easier money.

But the consequences are quite a bit more varied some straight from Econ 101 and others unique to the current circumstances.

Read the article. US exports will be more expensive but the fall in oil prices will be more beneficial in dollar economies that elsewhere. Imports will be less expensive taking away the risk of excessive inflation. And, Americans will be able to travel abroad more cheaply than they have for years.

Russia and the Cost of Hard Currency

In order to do business with the rest of the world Russia needs hard currency. The ruble has taken a bad hit over the last year and will continue to fall simply as one of the effects of a stronger dollar. Newsweek presents their thoughts on the Russian sanctions, their outcome and timing.

Russian Finance Minister Anton Siluanov is among those declaring the currency crisis over and promising rate cuts to follow currency stability.

Conversely, many market analysts have warned of an imminent, full-blown economic crisis including a credit crunch, exchange-rate-driven inflation, sky-high interest rates and rising unemployment.

Both assessments are off the mark. The reality is that these are early days in the crisis; sanctions and oil together are imposing massive economic dislocations and those costs will rise over time as sanctions bind more tightly, limiting the resilience of the Russian economy. Russia still has substantial financial buffers and economic policies that it can use to delay an economic crisis, but market pressures are likely to return sometime in 2015.

The steadily improving US economy gives the USA a great deal of leverage in dealing with international crises, the Russian annexation of Crimea and interference in Eastern Ukraine included.

Commodity Currencies

So called commodity currencies are falling along with the price of crude. Then add the thriving US economy and rising value of the dollar. This makes all dollar denominated items more expensive, reduces trade and in the end threatens a global deflation. ActionForex says

The domino effect of crashing oil prices continued to send commodity currencies lower during trading on Tuesday. One major mover was the USDRUB, with the pair rallying to a level not seen since the infamous Central Bank of Russia (CBR) overnight 6.5% interest rate rise. With the economic environment being so heavily against Russia at the moment, the Rouble weakness is coming as no surprise. Russia is highly reliant on oil exports and with oil prices yet to find any floor, the CBR will continue to face a tough task of strengthening the currency. Bearing in mind Russia is also approaching what appears to be an inevitable recession, the CBR’s task to defend the Rouble from weakening is likely to become even tougher.

The world of today is interconnected in many ways. One of the effects of a stronger dollar is to make US products too expensive. This will bring down US exports and the US dollar as the market balances things out, as it always does.