by Oliver Donaldson
The US dollar is the reticent winner of the forex market after a tumultuous year in 2016, which has set up an unknown and perhaps dangerous path for the American manufacturing sector in 2017. Perhaps too strong for its own good, the rising US dollar will grapple with sweeping changes and promises made by President-Elect Donald Trump to return America to its global manufacturing powerhouse. Though currently very strong in its own right, the US Dollar is set to hurt American exporting manufacturers by making American products too expensive while simultaneously holding back promises of returning manufacturing jobs stateside.
There is a sense of renewed confidence in the US dollar as interest rate hikes and positive inflation data continue to give strength to the greenback. Fresh off 14-year highs on the Dollar Index (a currency index that measures the US Dollar against a basket of major currencies), the US Dollar rally seems almost unstoppable for months to come.
The case for a continued USD rally is made even more strongly when considering the sharp divergence between economic policies of major nations. America is the sole hawk in a world full of doves that is seeing excessively low interest rates and prolonged quantitative easing. In all, the US Dollar is poised to be the most valuable currency for some time to come and thus it will very expensive for most if not all countries to import from the USA.
Ironically enough and much to his demise, Donald Trump’s pledge to “Make America Great Again” has done its own work to spur the USD rally, which in turn will damage the prospects for the American manufacturing sector, even though protecting manufacturing workers was one of Trump’s chief concerns during the Presidential campaign. Trump will be frustrated to know that major manufacturers are already considering the strong US Dollar and its potential negative effects on their export sales in their 2017 forecasts. Scaling back forecasts isn’t just a budget issue however, and workers are set to feel the pain in the form of increased lay offs and job cuts in the coming year.
As per The Wall Street Journal, major manufacturers such as 3M Co. and United Technologies Corp. are worried that a strong dollar could make it harder to sell abroad in 2017. Aircraft maker Boeing Co. has taken it one step further by proposing actual plans for lay offs in its commercial-airplane unit next year. This is especially troubling for the aviation manufacturing giant as they have already cut 8% of their staff in 2016 alone, offering little else to say then “fewer sales opportunities and tough competition” as an excuse.
Put in numerical terms, the Wall Street Journal stated under a stronger USD; “Manufacturing production would be 3.6 percentage points lower under a strong dollar, inflation-adjusted imports would be 3.6 percentage points higher, and real exports from the U.S. to the rest of the world would be 6.2 percentage points lower.” Tough times indeed for America’s manufacturing sector, and as the US dollar rallies out of control. Even Trump’s transition team officials are declining to respond or comment.
To add insult to injury, it seems lack of exports from a strong USD isn’t the only reason why America is losing its manufacturing jobs. As the USD rises, other manufacturing bases become a more sensible considering their cheaper currencies and thus lower wages. China’s RMB is now at its lowest level in 8 years and the Mexican Peso dropped 13% since the election, making both countries cheaper for manufacturing. The strong USD will make it hard for Trump to bring back jobs to the US in his 4 years as President.
In all, despite its allure a strong national currency can be quite damaging to a country’s prospect for jobs. With no end in sight for the USD rally, it seems the American economy will struggle to keep manufacturing jobs both active and stateside for years to come.
by Oliver Donaldson