U.S. economy’s surprise risk: The dollar’s surge could weaken growth

The surging value of the U.S. dollar promises new bargains for American consumers and travelers but also presents big threats to the U.S. economy — in a trend that is shaping up to be one of the most unexpected and significant factors driving the global economy this year. The Washington Post reports.

The dollar ended Wednesday at its highest value — $1.05 — against the euro in 12 years, and many analysts expect it to become more valuable than the common European currency in coming days. Other currencies have also taken a slide, making overseas travel cheaper for Americans, but goods and services priced in dollars more expensive for foreigners.

The unexpected surge has led economists to reduce their expectations for U.S. economic growth this spring; this week, it pushed markets into negative territory for the year. It’s happening largely because the U.S. economy has been unusually strong amid a global slowdown, giving the dollar an advantage over other currencies.

Still, “it’s negative” for growth, said John Silva, chief economist at Wells Fargo Securities, adding: “It’s the unexpected movement of the dollar that has really caught a lot of people offsides.”

A wide variety of companies have reported sales declines as a result of the trend. For instance, Avon, the New York-based direct-sales cosmetics company, which counts Brazil, Mexico and Russia among its largest markets, is now planning to sell millions of dollars less of lipstick, powder and eyeliner abroad.

Massachusetts-based retailer Staples announced last week that it has sold fewer office supplies abroad this year, citing the dollar.

Meat and poultry companies are expecting to sell less as the price of imports rises in Europe and other countries. Beverages aren’t safe, either. The Wine Institute, a trade association for California winemakers, said that ­exports declined last year after four consecutive years of record revenue.

Linsey Gallagher, the institute’s vice president of international marketing, said much of the slowdown was attributable to a decline in exports to Europe and Canada, the biggest foreign buyers of Golden State wine.

“We’re quite exposed, with
75 percent of our exports going in that direction right now,” Gallagher said. “We’ve got our work cut out for us.”

While the job market has been strong in recent months, the rising dollar could eventually slow employment growth. Manufacturers have perhaps the most to lose from a surging dollar; they are already reporting declining orders.

As a result, manufacturing hiring appears to be taking a hit. Factories added just 8,000 new workers in February, down from an average of 18,000 a month last year.

“You’ve seen a drop-off the last couple of months,” said Scott Paul, president of the Alliance for American Manufacturing, a Washington group that advocates for policies to spur more factory jobs. “It’s going to present a big challenge to manufacturing.”

For American consumers, the flip side of the dollar’s rise will most immediately be felt in lower prices for imported goods at home — and cheaper trips abroad.

A stronger dollar will eventually mean Americans will pay less for French wine, Italian shoes and Belgian chocolates, said Silva, the Wells Fargo economist. But he cautioned that it could be awhile before retailers will pass those savings on to their customers.

International airline prices — denominated in dollars — aren’t falling, but hotel prices are. The popular travel Web site TripAdvisor forecast recently that hotel room prices would decline
7 percent overseas this year, with a 9 percent fall in Europe.

The biggest savings will come in places that Americans might not want to visit — Russia and Ukraine — but also in more likely destinations such as Sweden (down 19 percent), France (down
13 percent) and Morocco (down 12 percent).

Marriott International, with its fleet of 4,100 hotels around the world, is feeling both the ups and the downs of those trends.

Chief executive Arne M. Sorenson said in a recent conference call that the company is bullish about business at its European hotels this summer: About 20 percent of travelers there typically come from North America.

On the other hand, international arrivals were down 3 percent in New York in the fourth quarter.

Economists warn that companies depending on foreign tourists could face trouble. David Huether, senior vice president of research at the U.S. Travel Association, said that foreigners slowed their spending in the United States last year.

“The travel habits likely changed,” Huether said. “It could be that people shortened their trip,” he added, or that they spent less on souvenirs and meals while they were here.

The dollar is rising because the United States has emerged as an outlier in the global economy. Many other countries around the world, particularly in Europe, are struggling. In response, central banks in Europe and elsewhere are lowering interest rates. That has the effect of reducing the value of their currencies.

In the United States, by contrast, growth is relatively robust. Federal Reserve officials are preparing to raise interest rates later this year.

That strengthens the dollar.

Few forecasters saw the surge coming. The dollar has risen nearly 20 percent against the euro in the last six months. It has hit its highest value against the Japanese yen in eight years.

When the dollar is strong, it is easier for Americans to buy foreign goods and harder for foreigners to buy things from America. That usually adds up to a decline in net exports and lower overall growth for the economy.

As a result, economists have in recent weeks have reduced their forecasts for U.S. economic growth this year by a few tenths of a percentage point.

In official statements, companies tend to welcome the symbolism of a strong dollar while bemoaning its effects on bottom lines.

“On the positive side, a strong U.S. dollar indicates strength in our economy, and obviously, that’s good, given our position in the market here,” Mark Fields, chief executive of Ford Motor Co., told investors during a recent earnings call.

“Alternatively,” he said, “a strong dollar has an effect . . . on our competitive position, especially against competitors who import here into the U.S.”

Some exporters also hope that while the strong dollar may be a negative for the U.S. economy in the short term, attempts to boost growth through monetary policy in Europe, Japan and elsewhere will ultimately lead to a stronger economy at home and abroad.

By making foreign countries more competitive, the reasoning goes, their economies will improve, their currencies will strengthen and locals will have more ability to buy U.S. goods.

“We want a strong Europe” in terms of growth and buying power, said Chad Moutray, chief economist for the National Association of Manufacturers. “We want a strong China and Japan. . . . In the sense that those actions lead to stronger economies and stronger export markets for us, that’s a positive in the long term.”