Surging dollar rattles world economies, markets
The US dollar hasn't been on a roll like this since Ronald Reagan sat in the White House.
Since June 30, the greenback is up 28 per cent against the euro, 18 per cent against the Japanese yen and 40 per cent against the Brazilian real. Not since 1981 has the dollar been so strong.
Some United States companies and investors wish it would take a breather. Delta Air Lines said on Wednesday that the strong dollar is hurting ticket sales in some foreign markets and announced plans to pull back international service, primarily in Japan, Brazil, India, Africa and the Middle East. Johnson & Johnson on Tuesday blamed the dollar, in part, for dragging first-quarter earnings down nearly nine per cent.
Meanwhile, the International Monetary Fund (IMF) downgraded the outlook for US economic growth this year and next, citing the strong dollar's damage to American exports.
The dollar is rising largely because the US economy is outperforming most other developed economies and because US interest rates are higher than those in Europe and Japan.
The run-up is having a big impact around the world. In the United States, it is pinching corporate profits, weighing on economic growth and delivering bargains for American tourists. In Europe and Japan, it's providing relief for economies that have been ailing for years. And in the emerging markets of Asia and Latin America, it is threatening financial stability.
Here's a look at the dollar's far-flung impact on:
The rising dollar hurts US companies that do business abroad in two ways: It makes their products more expensive - and therefore less competitive - in foreign markets. And it means that the revenue US companies collect in euros or yen is worth fewer dollars when they bring the money home.
J&J, for instance, said unfavourable exchange rates reduced the value of overseas sales by 13 per cent in the first quarter.
Overall, the outlook for first-quarter corporate earnings has steadily deteriorated as the dollar climbed. At the end of last year, analysts were expecting Standard & Poor's 500 companies to register a four per cent increase in earnings for the January-March period. By March 31, they were bracing for a five per cent drop, according to FactSet and PNC Financial Services Group.
Earnings are expected to drop 12 per cent for companies that get more than half their revenue outside the United States; the rest are expected to register flat earnings.
Weighed down by a strong dollar, US exports fell three per cent last year and were down another one per cent the first two months of this year compared to January-February 2014. A drop in exports reduces US economic growth.
Citing the dollar's impact, the IMF on Tuesday downgraded the outlook for the US economy. The IMF now expects economic growth of 3.1 per cent both this year and next. That's solid - and an improvement on 2014's 2.4 per cent expansion - but it's down from the IMF's January forecast of 3.6 per cent growth in 2015 and 3.3 per cent growth in 2016.
Meanwhile, Japan and Europe are poised to benefit from the dollar's might.
The IMF predicts the Japanese economy will grow one per cent this year versus an earlier forecast of 0.6 per cent. It also upgraded the forecast for the 19 countries that use the euro currency to 1.5 per cent growth this year, up from a January forecast of 1.2 per cent.
In the emerging market countries of Asia and Latin America, the stronger dollar cuts two ways. Yes, it gives exporters a lift, but it also poses a threat to financial stability.
Enticed by low interest rates, emerging market countries borrowed heavily in US dollars over the past decade. From 2005 to 2015, dollar-denominated debt - mostly corporate bonds and loans - shot up from US$262 billion to US$837 billion in the emerging markets of Asia and from US$586 billion to US$963 billion in Latin America, according to the Institute of International Finance.
As the dollar rises, it takes more local currency to generate enough dollars to meet loan payments. Emerging market corporate borrowers could get squeezed. The pain could spread if those companies suddenly withdrew deposits from local banks to meet their US dollar payments, or if the investors who own the emerging market bonds get rattled and sell them in a panic.
In a report Wednesday, the IMF warned that "financial risks have increased in many emerging markets" and said a stronger dollar and weaker local currencies create "balance sheet strains for indebted emerging market firms" and for governments.
The strong dollar makes European vacations cheaper for American tourists. Booking.com estimates that the average price for a four-star hotel room in Paris, Rome, Barcelona, Amsterdam and Berlin is down 21 per cent from March 2014 because of the dollar's rise against the euro. The company calculates that an American could spend 14 days in Barcelona for the price of seven days in Palm Springs, California.
Lyssandros Tsilidis, president of the Hellenic Association of Travel and Tourist Agents, said Greece has seen a 15 per cent to 20 per cent increase in reservations from the US - Europe's biggest long-haul market compared to the same time last year. Spain saw a 12 per cent increase in January and almost 19 per cent in February.