U.S. Treasury Secretary Jacob J. Lew said earlier this year that a strong dollar is good for the nation. Economists at the Federal Reserve Bank of New York aren’t so sure.
With the dollar gaining about 20 percent against its trading partners in the past year, American exporters tend to cut prices to absorb the currency shock and remain competitive, according to the New York Fed. Meanwhile, as the dollar serves as the most widely used currency in global trade, most global manufacturers end up pocketing higher profits without adjusting their prices lower for U.S. importers.
“What is special about the U.S. case is that its export prices, and import prices, are mostly denominated in U.S. dollars whereas other countries tend to set prices in the currency of the destination market,” economists Mary Amiti and Tyler Bodine-Smith wrote in a report. “This pattern of invoicing combined with price stickiness can help explain the much bigger impact on export volumes than import volumes.”
A stronger dollar has become a hurdle for the Fed as policy makers plan to raise interest rates for the first time in almost a decade. Fed Chair Janet Yellen said earlier this week that currency appreciation in the past year has been significant and is a factor affecting the outlook for the economy.
The dollar headed for its best week in two months, with the Bloomberg Dollar Spot Index climbing to a three-month high after a report showed annualized consumer prices rose for the first time in six months in June. The greenback, which was the best performer against its nine-developed nation peers in the past month, gained this week as investors shifted focus to the outlook for U.S. rates after concern over Greece and China receded.
While a stronger currency benefits consumers and firms that import goods from abroad, encouraging domestic consumption, it makes exports less competitive.
A 10 percent appreciation in the dollar contributes to a 0.7 percentage point decrease in gross domestic product over two years, according to the New York Fed.
In January, Lew said a strong dollar benefits the U.S.
“I’m going to repeat what I and all my predecessors have always said, which is a strong dollar is good for America,” Lew told Bloomberg Television’s Erik Schatzker at the World Economic Forum’s annual meeting in Davos, Switzerland. “We have an economy which, on a relative basis, is a lot stronger than other economies in the world.”