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12.27.2016

Why Dollar Strength Is Actually A Good Factor For US Economy?



Christopher Wood, strategist for CLSA Asia-Pacific Markets, has turned bullish on China amid cautious optimism as Donald Trump enters the White House.  Woods has also said that If the Trump story really follows through, it’s a better story for small-cap stocks in America. If the dollar remains strong, it will be a negative for Asia and emerging markets. But in my view, this dollar strength won’t persist in all of 2017. It may peak when Donald Trump walks into the White House., according to a story in newsmax.

(http://www.newsmax.com/Finance/StreetTalk/christopher-wood-trump-china-asia/2016/12/26/id/765630/?

Another story in CNBC says that President-elect Donald Trump's shock comment that the dollar is too strong suggests the U.S. is about to declare as dead a two-decade policy of publicly favoring a strong currency. There's no question that the Trump administration would not want a strong dollar. A strong dollar does nothing good for whatever Trump is basically trying to do," said David Woo, Bank of America Merrill Lynch's head of global rates and foreign exchange research. "Yes, the U.S. fundamental story is bullish for the U.S. dollar, but the problem here is they actually don't want a strong dollar. I think it's going to go up. However, it's going to be a much more volatile climb."

(http://www.cnbc.com/2017/01/17/trump-just-signaled-death-of-clinton-era-strong-dollar-policy.html)

However, the anecdotal evidence suggests otherwise. In a paper titled Dollar power: The economic and market implications of a strong dollar, Dan Morris notes that Fears of a strong dollar are unwarranted. The rising value of the US currency reflects the relative strength of the US economy. (https://www.tiaa.org/public/pdf/PM_and_TL_Dollar+WP+2015-02-25_RBS.pdf)

The paper says that the recent swift rise in the dollar; more than 10 % since May 2014 and twice that since 2011 has raised  worries about the impact on the U.S. economy  and financial markets. The concern is that a strong currency will reduce U.S. exports and lead to slower economic growth. This fear  is  misplaced  for  several  reasons. First, it confuses cause and effect.  The value of the  dollar reflects the strength of the U.S. economy relative to its  trading partners. As long as the U.S. continues to grow at a faster pace than much of the rest of the developed world , the dolla r is likely to continue gaining  in value. It is true that U.S. net exports  would  be lower than if the dollar had  not appreciated, but the U.S. economy is not very trade dependent.  Goods  and services e xports account for  only  13% of GDP , compared to nearly 50%  for Germany. In fact, because  the U.S.  is a net importer, its  economy benefits  more from cheaper imports than it loses from  more expensive  exports . Companies gain as  the cost of imported materials and machinery falls, while  consumer s see lower food and product prices in stores.






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