Sorry Exporters, a Strong Dollar is Golden in U.S.by Lei Xuan

About 20 central banks have cut interest rates to boost economy since the beginning of the year. The unusual move will usually devalue a coun-tries currency and promote exports.

The world is in a currency war, warns A. Gary Shilling, president of the New Jersey-based consultants A. Gary Shilling & Co.

A moderate depreciation of currency is, indeed, espe-cially good for countries who rely heavily on exports. A weaker currency makes export goods cheaper in foreign markets.

While overseas firms benefit from currency deprecia-tions, some U.S. companies have been hurt by appreci-ation of the dollar. U.S. firms from McDonalds Corp. to Apple Inc. all reported shrinking or lower-than-expected overseas revenues when they converted foreign curren-

cies into the dollar.

But Americans still benefit at plac-es like the gas pump.

The dollar is the global reserve currency, says Adolfo Laurenti, managing director and chief in-

ternational economist of Mesirow Financial. Import goods, such as commodities and energy, are priced in dollars. They get cheaper as the dollar strengthens, which is good for U.S. households.

Economists believe some of the money saved from fall-ing energy prices will be spent to bolster other sectors in the economy.

Many central banks are chopping interest rates to push their

currencies down. They all hope to spur exports to offset internal

weakness, says Shilling.

A New Currency War?

Since January, the European Central Bank has launched quantitative eas-ing, a monetary policy that purchases financial assets from commercial banks to increase the amount of money in financial markets. The QE program has made the euro further depreciate about 2 percent against the U.S. dollar in one month.

Australia, India, and Canada cut interest rates in tandem to boost their econo-mies. Those countries currencies all devalued against the U.S. dollar as well. Click images below to see how major currencies have devalued against the U.S. dollar.W

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A. Gary ShillingPresident of A. Gary Shilling & Co.

Bluford PutmanManaging Director and Chief Economistof CME Group

HEAD TO HEAD ONCURRENCY WAR

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When so many countries try to devalue their currency, the competitive devalua-tions offset each other. Nevertheless, all are devalued against the U.S. dollar, which, as the worlds currency, cant devalue, Shilling says.

Currency war has become a buzzword since former Brazilian Finance Minister Guido Mantega used the term in 2010. He adopted it to describe a condition when countries compete with each other to hold down their currencies and gain an advan-tage in global market.

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The U.S. economy is recovering on several fronts. The U.S. GDP in 2014 recorded a 2.4 percent growth, the strongest year since 2010. The unemployment rate was 5.5 percent in Febru-ary, just within the 5.2-to-5.5 percent level, which the Federal Reserve views as normal.

The U.S. economy is in much better shape than the rest of the world. Europe is still trying to pull out of stagnation. Japan temporarily rolled back into re-cession in the second and third quarter of 2014. In-vestors show confidence in the U.S. economy and thus turn U.S. dollar to be a safe-haven currency.

In general, having a sound currency is a very good idea, says Dr. Phil Levy, senior fellow on the global economy for the Chicago Council on Global Affairs. It is better than people worrying about losing its value.

However, the appreciation of the dollar also means the U.S. exporters are going to face more challeng-es, according to Levy.

Levy points out that the 2014 fourth quarter of U.S. GDP growth missed forecasts at 2.6 percent, com-pared to second quarter 4.6 percent and third quar-ter 5.0 percent growth rates.

Weak exports partly drove the slowdown. Exports could fall even harder since the dollar is still ad-vancing against most of the foreign currencies. Nevertheless, it should also be noted, as a sign of economic recovery, consumer spending, which ac-counts for two-third of the U.S. GDP, increased at a fast pace at 4.3 percent, the best performance since the first quarter of 2006.

I think the U.S. economy is doing relatively well, Levy says. The drag comes from the slow growth from the rest of the world.

Phil Levy of The Chicago Council on Global Affairs explains:

What Does A

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U.S. Economy

2015

Could the U.S. economy sustain solid growth in 2015 without being dragged down by the relatively weak global economy? All eyes are set on Federal Re-serves monetary policy now.

While other central banks are cutting interest rates, the Federal Reserve is expected to raise interest rates some-time between June and December. An interest rate hike will show the Federal Reserves confidence on the U.S. economy and decrease the amount of money in the finan-cial market. It will drive the dollar even higher.

In January, the Federal Reserve told the public it would be patient in deciding when to raise interest rates. The Fed has an increased concern about the global economic out-look, as well as the announced and anticipated foreign central bank policies.

Cartoon by Donkey Honkeyunder a Creative Common license

There are two ways we can think it (international development) may affect the Feds action, says Levy. One way, you can say [other countries] are driving down their currencies. We need to respond. I think thats very unlikely. The other one is, they are loosening their monetary policy. Therefore, their economy re-vives, which means there will be a greater demand in the world, so that we can go ahead our plans. I think thats more likely.

Experts are generally optimistic about the U.S. economy. Whether or not they see a currency war, they all agree that the depreciation of other currencies wont stop the U.S. economic recovery because the main driving force of the U.S. economy comes from domestic factors.

The strong dollar doesnt affect the American economy much, says Shilling, U.S. exports are only 13.5 percent of the GDP, the lowest of all G7 and BRIC countries except Brazil.

Unless there is a geo-political crisis in Ukraine or Middle East, or a major financial crisis in Europe or Asia, Laurenti says he doesnt think the global market will pose a big threat to the U.S. economy.

While the U.S. economy is more integrated with the global economy than it used to be, most of the strength we anticipate in 2015 is based on domestic factors, so U.S. growth should not be too dependent on developments abroad, he says.

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