Good news for shoppers and Americans eyeing a trip to Europe this year, not so good for exporters and U.S. tourist attractions: The muscled-up U.S. dollar will keep rising at least through the rest of the year and into next, relative to many other currencies.
Buoying the buck: Healthier U.S. GDP growth and higher interest rates compared with most other advanced economies. And given the uncertain economic conditions abroad, the U.S. will remain a safe haven for foreign investors.
For U.S. businesses and consumers, the stronger greenback is a mixed blessing, with varying impact on bottom lines and pocketbooks.
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Among the beneficiaries: Manufacturers that buy large amounts of raw materials abroad. Alcoa, for example, imports large quantities of bauxite for making aluminum from Brazil and Australia, and credits the buck for good fourth-quarter earnings.
Retailers with suppliers in other countries. Think Macy’s and Target — both sell many items from foreign suppliers, especially ones based in China. The effect will be muted, though, because the dollar is not rising against China’s yuan, since Beijing has pegged its currency to the dollar.
European and Japanese makers of cars, consumer goods and business equipment. Firms such as Canon of Japan, which makes cameras and other imaging and optical products; L’Oréal, the French-based cosmetics company; and German-based Siemens, a manufacturer of a variety of industrial and medical gear.
Plus American consumers, who will shell out less for imported goods and services. Folks eyeing vacations to Europe or other overseas travel destinations can count on getting more bang for their buck because of the currency swings.
On the flip side: Exporters of all stripes will take a hit. Exports will still rise this year, but they’ll be up just 3% versus a previously expected pickup of 5%-6%.
Many large U.S. multinationals are bracing for a blow to their earnings. Some have already lowered earnings estimates for 2015. United Technologies, 3M, Johnson & Johnson, IBM and Apple are among the firms scaling back expectations. The companies in Standard & Poor’s 500 derive about 46% of their revenue from abroad.
U.S. tourism will also feel the effect. Amusement parts and other attractions will see the rate of foreign visitors slow this year, and the ones who do come will spend less.
The strong dollar will shave about a half a percentage point from GDP growth — all things considered. It also removes some of the edge from U.S. inflation as import prices decline, reducing the urgency for the Federal Reserve to raise interest rate hikes. We still see the Fed raising rates, but not until midsummer or so.
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