How Does a Strong Dollar Hurt the US Economy?

A picture of how a strong dollar hurts the US economy comes from the American agricultural heartland. Seeking Alpha notes that the high dollar is raising crop prices and making US farm products less competitive. Consequently farmland price are falling.

Rural bankers remain pessimistic about their local economy, primarily due to the strong U.S. dollar that continues to hamper domestic crops sales on the global market. Respondents in this month’s survey suggested farmland prices were declining more quickly than in past months.

The Rural Mainstreet Index (RMI) lies in the 40s indicating a slide in business and value. The Farmland price index has fallen from 39.4 to 33.4, a stronger indication of decreasing value. The strong US dollar is hurting the agricultural sector and the banks and small towns that depend on agriculture.

Corporate Earnings

The strong US dollar is cutting into US corporate earnings. CNN reports that US corporations need to stop relying on a weak dollar for their profits.

Although the rise in the value of the dollar has been quite substantial over the past 12 months, it has only been in the last four or five months that the impact of this increase on corporate profits has been felt.

The value of the U.S. dollar is expected to stay strong for the near term and even possibly rise higher as the Greek situation in the Eurozone worsens and the Federal Reserve starts to raise short-term interest rates.

The issue of falling profits at multinational U.S. companies will eventually become a political problem if the weakness in earnings continues. This situation occurred in the 1980s as the Paul Volcker-led Federal Reserve tightened up on monetary policy, forcing short-term interest rates to post-World War II highs and causing a major increase in the value of the U.S. dollar.

The strong dollar makes products manufactured in the USA more expensive in offshore markets and therefore less competitive.

Railroads Suffer from Cheap Oil and a Strong Dollar

Reuters posted an interesting article about how cheap oil and a strong dollar hurt railroads.

Low oil prices and the strong U.S. dollar made for a somewhat painful first quarter for major U.S. railroads CSX Corp and Norfolk Southern Corp , and may continue to weigh on their profits.

Both companies derive about a fifth of their revenue from hauling coal, which faces competition from lower-priced petroleum products.

CSX, the third largest U.S. railroad, on Wednesday cut its forecast for 2015 earnings-per-share growth to a mid-to-high single-digit percentage range from double digits.

Chief Executive Officer Michael Ward told Reuters the reduced outlook reflected the impact of the strong dollar, low oil prices and the weak coal market.

Until the price of oil goes up anyone who can use oil or natural gas instead of coal will do so. Because railroad haul coal this is a problem. Likewise, when industry and agriculture sell less overseas due to a strong dollar the railroads haul less freight. When the Federal Reserve raises interest rates later this year it will further drive up the value of the dollar and compound these issues. Likewise economic problems in China, Japan and Europe are likely to weaken their currencies and drive the dollar even higher.

How Does a Strong Dollar Hurt the US Economy? PPT


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