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The US Dollar’s Impact on the Global Economy Is Dwindling

By Ed Moy

As the U.S. dollar surges in strength, its positive impact on the global economy has been minimal. This indicates the depth of how bad of shape the rest of the world is in, and that could have a significant negative impact on the United States.

The dollar is up more than 7 percent this year relative to major Western currencies. That is because our mediocre, but generally positive, growth looks absolutely stellar compared with most other major economies. The European Union appears to be headed toward its third recession, with its two biggest growth engines, Germany and France, beginning to stall. In Asia, Japan’s economy is headed toward another bout of deflation and China’s economy is showing signs of trouble.

For Americans, a strong dollar makes imports cheaper. That helps consumers who buy foreign goods. But it also hurts the creation of domestic jobs because our exports cost more and therefore foreign consumers buy less, which decreases the need for more employees. For the rest of the world, it makes U.S. goods more expensive, which boosts purchases of their domestic goods. And it creates more foreign jobs because U.S. consumers should be buying more foreign-imported goods.

But not all is going according to plan.

American consumers have been stingy when it comes to opening up their pocket books, and spending, while slowly and fitfully rising, has been off from normal levels. This is due to the record 92.3 million working-aged Americans not participating in the workforce, stagnant wages and the fact that many of the new jobs created have been part time. As a result, as spending inches up, so has credit card debt. And while consumer confidence is slowly rebounding, it is significantly off pre-financial crisis levels.

Because American consumers buying is only slowly increasing, the global economy has not felt as positive impact of a strong dollar. The U.S. trade gap has unexpectedly shrunk in recent months to the lowest level in seven months, which means imports are decreasing. This period coincides with the dollar reaching new highs.

However, the U.S. job creation has felt the drag of a strong dollar. The unemployment rate has been going down, but a large component of that is because the denominator has been shrinking. More American workers have completely given up looking for work than new jobs are being created. Domestic service jobs are being created at proportionately higher levels while there have been proportionately fewer well-paying manufacturing jobs created.

And foreign job creation has not benefited as much from a strong dollar. During the rise of the dollar in the last three months, the unemployment rate of the European Union hovered steadily around 11 percent, China steadily around 4 percent and Japan steadily around 4 percent.

Despite the boost from a strong dollar, the world economy continues to struggle.

There are several risks. This weakness puts a lot of pressure on U.S. domestic spending to boost the U.S. economy, so our economic recovery could be jeopardized if spending does not recover. Also, if the rest of the global economy stagnates or declines, that could pull the U.S.’s fragile recovery down with it. And heaven help us if a black swan event or two happen.

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