Strong U.S. dollar affects businesses and travelers alike

Graph of the spot US dollar index price reflecting monthly values for the past year
Annabelle Ju/MEDILL

The U.S. dollar has risen nearly 8 percent against major currencies in the past four months to the highest level since June 2010, in a move that has implications for U.S. businesses and travelers alike.

A rising dollar gives Americans more buying power in the global market place. Driving the trend, experts say,  is strength in the domestic economy.

“There is an underlying perception of the strength of the U.S. economy vis-à-vis other economies around the world,” said Adolfo Laurenti, chief international economist at Mesirow Financial Inc.

Recent signs include better job growth in the U.S., rising home prices and near-record stock prices. Real GDP, the broadcast measure of the economy, rose 4.6 percent in the second quarter, compared with a 2.1 percent decline in the first quarter.

According to the report, the GDP growth was fueled partly by personal consumption expenditures, which increased 2.5 percent in the second quarter, compared with 1.4 percent in the first quarter. Real exports of goods and services this period jumped 11.1 percent, a sharp contrast to a 9.2 percent decrease in the previous quarter.

USD vs EuroAmid weakening conditions, European Central Bank President Mario Draghi on Thursday repeated his Sept. 4 pledge to expand the ECB‘s balance sheet with a bond-buying stimulus program, known as quantitative easing.  The euro fell to a two-year low of 1.26 at Wednesday’s close.

Japan’s economy has languished due in part to a rapidly decreasing working-age population. The Bank of Japan’s aggressive quantitative easing program to try and boost growth has elicted pleas from experts – including Federal Reserve Chair Janet Yellen – that it should exit the program. The yen fell to its lowest level in six years to 109.66 at Tuesday’s close.

As Japan and Europe continue their major stimulus plans indefinitely, the US is nearing the end of its bond-buying stimulus program.USDJPY

“The economy has improved to the point where it’s no longer necessary to have extraordinary measures,” said Andrew Busch, a Chicago-based financial consultant.

The Fed’s policy-marking arm, the Federal Open Market Committee, announced Sept. 17 that it would cut back purchases of mortgage and Treasury securities by $5 billion. Economists expect the Fed to end the purchases altogether at its next meeting in November. This, according to Laurenti, puts the Fed a step ahead of other central banks.

The U.S. dollar, measured against a basket of six major currencies, has risen to a more than four-year high to 85.97 as of Wednesday’s close, a 7.2 percent increase from 80.22 a year ago and a 7.8 percent jump from its last low of 79.78 on June 30, 2014.

US travelers and companies benefit

American companies that rely on imports are effectively getting automatic price discounts by paying with a strong U.S. dollar.

Annabelle Ju/MEDILL

Cream Wine Co. in Chicago’s West Loop neighborhood is a wine-importing company buying products from some 14 countries. Its partner and director of sales Andy Pates said Cream Wine tries to set long-term, stable prices based on realistic assumptions.

“We raise and lower prices with noticeable fluctuations [in the dollar value],” he wrote in an email.

Moonrings, a Chicago-based travel agency, has seen a near doubling of clients interested in luxury vacation, which can cost anywhere between $8,000 and $25,000 for two people.

Annabelle Ju/MEDILL

“I think that people who thought that maybe a trip abroad might be out of reach have started to realize that, ‘Oh, maybe I can do that trip,’ and ‘I can afford it a little bit more and get a little bit more for my money than previously,’” said Kevin Doheny, luxury travel advisor at Moonrings.

For U.S. exporting companies, it’s a different story.

Major exporter Caterpillar Inc. may have more difficulty selling its earth-movers to overseas buyers. According to the company’s retail statistics, sales in August 2014 went down 24 percent in Asia and 10 percent worldwide, while they increased 8 percent in North America. Its second quarter earnings report showed a decrease in the revenue outlook for 2014 to reflect weaker sales in China, the Commonwealth of Independent States and the Africa and the Middle East region.

But the Boeing Co., a major exporter of aircraft, said the impact on its sales is not as great because it takes several years on average to manufacture, sell and deliver its products.

“Currency fluctuation is less of an impact than you’d think for us,” said Charles Bickers, director of corporate communications, “because airplanes are ordered and delivered in a really long period – a number of years.”

With the dollar in its 12th week of strong growth, some are predicting more strength ahead.

“Over the next two years, I think we are expecting fairly consistent gains by the dollar,” he said.

The spot dollar index closed Wednesday at 85.97, up 0.03 or less than half percent from the previous closing value of 85.94, according to Bloomberg LP.