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This article discusses the effects of a strengthening U.S. dollar on various stakeholders. The U.S. economy is currently improving amidst generally weakening economies, such as Germany and France. For another article discussing different impacts on the U.S. dollar (and more specifically, the differences in monetary policy between different economies) on different stakeholders, click here.
1. Investors: With the economic strength of the U.S. and a weaker world economy, investors are attracted to U.S. markets, where they can finally reap large benefits from a “carry trade” strategy.
The incentive to invest in bonds and stock in America is intensified for investors by America’s economic performance, regardless of the interest rates America offers.
2. American citizens: Positives for America include an influx of money to fund governments, an increase in purchasing power and a decrease in import prices.
Negatives include less competitive exports, devaluation of overseas profits, and an eventual decrease in GDP.
3. Other QE-leading economies (i.e. Japan and Europe): Exports are now cheaper, and consequently, more attractive, fuelling production and avoiding deflation. This is especially good for Japan who has been struggling with deflation for decades.
4. Emerging markets: Capital will flow out of these emerging markets and into the U.S., which will exacerbate their governments’ ever-growing debt problem, especially as they have borrowed in dollars (this is to say that if they have borrowed in dollars, and the price of the dollar goes up, their debt increases as well).
5. World government: Economies might have to resort to protectionism (in the long, long run), such as America, because the export sector of America will suffer if there is stubbornly high dollar.
1. Trade-weighted basis: this term is found in the first paragraph of the article. What does it mean? If a currency is calculated on a trade-weighted basis, it means that the currency is valued based on the amount of its currency that is being bought and sold for goods and services.
2. Carry trade: Carry trade is borrowing from economies with low interest rates and investing in ones with high interest rates, which, in this case, the U.S. In another article, it discusses how carry-trade was nearly impossible for a long while because all interest rates were very similar, i.e. pretty much 0%. The risk with carry-trade is that fluctuations between currencies might be so great that carry traders might find that when they convert their earnings back to their home currency, the value is suddenly so little. On the other hand, it could be very high! For this reason, many people refer to carry trade as “picking up pennies in front of a road roller” – the risk is very high.