What does a “strong dollar” mean? The strengthening of a currency essentially means that one currency has increased in value relative to another. For example, if a new Japanese car costs a United States consumer 10K one year and then $15K the next, it very well could imply that the Japanese Yen increased in value, or appreciated, towards the American dollar – thus explaining the rapid increase in price.
What happens when the US Dollar increases in value against foreign currencies? This is important because it affects our businesses by creating an artificial cheapness of foreign products, therefore reducing the general willingness to invest domestically. Essentially, US corporations take advantage of this imbalance by seeking off-shore opportunities to gain more ‘bang’ for their buck. This alleviates the risk of corporate profits suffering the squeeze of a strong dollar. These factors then lead to a larger trade deficit as reliance on imports rises and, in the long run, costs the US both new and pre-existing manufacturing (Mfg) jobs.
Procter & Gamble
Procter & Gamble (P&G) is a Cincinnati-based company that develops and manufactures staple consumer products and everyday necessities. As a global corporation, however, P&G faces inherent yet significant risks with international exchange rates; the more foreign rates fluctuate, the higher the risk of major financial impact. When a corporation like P&G feels at risk, they apply various investment strategies known as ‘hedging’ to mitigate profit loss. Even with such measures, the Cincinnati giant cannot avoid all losses as it is expected to lose $4.1B in sales (a 5.1% decrease) due to fiscal year (FY) 2023 foreign exchange risks,
During this period, P&G plans to expand its Lima, OH plant by 2026 – a $501 million investment estimated to create 135 high-paying Mfg jobs. Without the FY 2023 sales loss P&G could have dramatically increased its investment, making the same investment 8x over and creating over 1,000 more high-paying jobs within the tri-state area of Ohio, Kentucky, and Indiana. This isn’t to say that local communities don’t benefit from having P&G nestled here in the tri-state – just that the corporation could have the opportunity to do more.
The US Consumer
As consumers, we might only see the short-term good – cheaper imports and less expensive trips abroad. The long-term effects on the US, however, will see stifled domestic businesses grow increasingly reliant on foreign manufacturers, returning us to a cycle of off-shoring at the loss of high-paying Mfg jobs. US corporations, especially those operating internationally, will eventually face tightened profits and potential downsizing. Furthermore, if history is any indicator, foreign countries will intentionally intervene with the market to prevent their own currencies from appreciating against the US dollar – protecting both their governments and the security of their exports.
In 2014, Toyota made an estimated $7.5B gain due to currency swings within Japan after the Yen experienced a 35% decline against the dollar from 2011-2014. With this kind of aggressive currency manipulation amongst global economies, US corporations will find themselves at a major disadvantage internationally leaving the average American suffering from the consequent financial squeeze. All that to say, this isn’t a new problem, and it won’t go away without fervent change.
At the moment, a strong US dollar paradoxically serves as a tax on domestic manufacturers and as a subsidy for foreign imports. A strong dollar has hurt US Mfg for years and will continue to discourage domestic investment so long as the general perspective remains the same.
By prioritizing a strong dollar and cheaper imports over domestic Mfg, we continually allow ourselves to run increasingly larger trade deficits year after year. The US must disassociate itself from the “strong-dollar” mentality and cease our reliance on it as a means for reducing inflation if our country hopes to prosper domestically.