Support for the strong dollar is a tenet of faith among Democrats and Republicans alike in Washington.
“The strong dollar, as all my predecessors have joined me in saying, is a good thing. It’s good for America. If it’s the result of a strong economy, it’s good for the U.S., it’s good for the world,” said Treasury Secretary Jacob J. Lew in Davos this month.
But it’s not so good for corporate earnings, as a spate from the past week can attest. Yesterday, Google announced fourth-quarter revenues of $18 billion, “despite strong currency headwinds.” Doug Oberhelman, the head of Caterpillar, warned that the “rising dollar will not be good for U.S. manufacturing or the U.S. economy” on an earnings call. And Apple, despite posting a gob-smacking quarterly net profit of $18 billion, warned that foreign-exchange rates posed a “clear headwind.”
The list of companies worrying about the dollar’s brawn goes on: United Technologies, Microsoft, Dupont. Procter & Gamble — the giant maker of shampoo, razors, dish soap, tampons, and on and on — said it expects no growth this year owing to currency issues, with its chief financial officer describing the change as “the most significant fiscal year currency impact we have ever incurred.” The company, by the way, was founded in 1837.
The strong dollar is in many ways a product of overall economic strength. The United States is growing at a decent clip, while Europe, Japan, and many emerging-market countries are limping along. That flushes money into the American economy, boosting the dollar relative to the euro, the yen, and other currencies. At the same time, many of those countries have started to engage in aggressive monetary policy that also helps push down the value of their currencies.
The reason for all the fretting is that most of these big blue-chip companies derive a significant portion of their earnings and growth overseas. That strong dollar hurts American exports, by making American products more expensive for foreigners to buy. It also saps the power of earnings produced by American companies’ foreign subsidiaries.
It’s a perfect demonstration of why the phrase “strong dollar” — and politicians’ worship of said strong dollar — is so wrongheaded in the first place. Sure, a strong dollar is a nice marker of confidence in the American economy. It makes our imports cheaper. It also makes foreign investment and travel a good deal, too. But it often comes with a significant downside, just like a weak dollar does.
Economists and politicians have gently tried to point this out many times. Take this anecdote from Christina Romer, formerly the chair of President Obama’s Council of Economic Advisers. It describes an exchange she had with Larry Summers, the former Treasury secretary, who was helping prepare her for interviews with Congress and the press:
When he asked about the exchange rate for the dollar, I began: “The exchange rate is a price much like any other price, and is determined by market forces.”
“Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”
For the record, my initial answer was much more reasonable. Our exchange rate is just a price — the price of the dollar in terms of other currencies. It is not controlled by anyone. And a high price for the dollar, which is what we mean by a strong dollar, is not always desirable.
Summers, unleashed from Washington’s weirder political conventions, would certainly agree. But there is an easy way to introduce some nuance to our discussion of the greenback, and that is to get rid of the strong-weak terminology entirely. We could talk about “import-favorable dollars” and “export-favorable dollars.” Or “high-priced dollars” and “low-priced dollars.” Or even “luxury dollars” and “deal dollars.”
It’s a good way to think about those American companies’ predicaments. They’re selling goods with luxury dollars to companies purchasing in budget currencies. It’s a testament to the strength of the United States economy. But it’s also going to slow it down.