U.S. Dollar Reached a 2.5 Year High Friday: What Does It Mean for the Economy?

The U.S. dollar index (vs. major currencies) hit a 2.5-year high Friday, reaching the highest level since April 20, 2006 (see chart above).

Update: What's so great about a rising dollar?

1. Imports are cheaper. We buy almost $200 billion of goods from the rest of the world, but export only about $120 billion. Since our imports are greater than our exports, we have a net gain from a rising dollar.
2. A strong dollar makes gas and oil (which is priced in dollars) cheaper. As I have reported, consumers save $1.42 billion annually for every cent that gas prices fall. Consumers will save more than $200 billion over the next year from the recent fall in gas prices, and part of that price decline and consumer savings is from the stronger dollar.
3. The appreciation of the dollar suggests that inflationary pressures have eased for the U.S. economy.

Comments

[European:]

But US exports to foreign countries are more expensive. So it could end into a production reduction, due to a competitiveness reduction in foreign markets. Also, why north americans would choose national products when they find cheaper foreign products.
Less international income, increase of external debt owed in dollars and so increase of debt because of the less value of incoming foreign currencies are gonna result into worse situation for workers.
Bread for today, hunger for tomorrow.

2008 Oct 26 08:49 AM

[EUARTE:]

Look guys! The American economy is 70% self consuming so to speak. We make and consume our own products. There was a time when this figure was much higher. Our salaries and general corporate income was stronger and the dollar was king.
Then along came the preachers of a world economy. We were to believe we would be left behind unless we opened up and dealt with it.
The result was a weak dollar, low and stagnant wages and a lowering of our economic and military defenses.
The Socialist wanted the one world and the capitalist wanted more money. They joined hands and here we are!
A retooled American and even some tariffs would bring us back to where we were.
The American economy is for America first. We seem to have forgotten that. Alas, so have Obama and McCain.

2008 Oct 26 11:06 AM

[NOWHEREMAN:]

The "everyone should share the Pie with those who haven't helped bake the Pie" View may finally come to America around 20 years after it failed in Russia.

Had I only known, I wouldn't have tried so hard to get ahead. The American Dream ends this way. Immigrants used to try to get into this country to get ahead, now they will try to get in to get handouts.

We deserve the Politicians that we elect.

2008 Oct 26 11:25 AM

[Urbane Gori...:]

**And** repayments of foreign debt are now cheaper....

Also, EUARTE makes a good point. Evidence of this is the suggestion that investors begin looking at large cap American companies. It is also supported by several companies (err.... Hexel is one and some sleeping bag manufacturer..But I can't remember the name ..) are moving their manufacturing back to the US from China, because (trumpet flare here. ) it is now cheaper to make it here.

jegan ;-)

2008 Oct 26 04:43 PM

[Ahab:]

This isn't about the world recognizing relative value. It is about hedge fund redemptions, margin calls, repatriation and related short covering and a flight to cash; a disconnect due to FEAR in short that isn't going to be around long enough to translate into re-establishing gross imbalances in terms of trade and consumption with the rest of the world.

2008 Oct 27 06:35 AM

[European:]

The toxic investment products come from the weak north american legislation. Wall street have been trading in the same way the vertical trusts did, also a north american invent. USA has infected other markets. So, who say that america should be an autarky with strong dollar and all this shit, should think that then, they have to eat back that subprime stupid loans, that stupid wars against foreign and far away countries, and use all the money to build a huge wall on the 12 mile national sea limit. Usa dollar is also growing up because of the need of dollars to pay the losses that the line "Subprime loan->MBS->CDA-&... has made. Also it is being proved, that the politics of the FED has been taking last years since desregulation on 1999 has made all this problematic. World is paying wall street debt. So please, when the national proudness appear, at least dont be unfair.
And about defense... Well, without entering into wars, you would not need such an army. Spain has a terrible army, we dont enter into war to impose our way of life, and moreover, with this money we have universal health care. And our health spends are 1/4 of american, with higher basic costs.
I endorse capitalism, and the free market. But it has to be regulated. People first.

2008 Oct 27 10:40 AM

[European:]

"subprime loan-> MBS-> CDO -> CDS" (Mortgage backed securities, Collateralized debt organizations, Credit default swaps). At the previous comment this part has appeared cut.

2008 Oct 27 10:43 AM

[NOWHEREMAN:]

Don't forget the thousands of small but now undercapitalized Insurance companies and agencies which are audited on a Calendar Year basis and who probably followed the lead of the industry leader, AIG. This could be the straw that breaks the camel's back since everyone has insurance of some type.

Obama election rally followed by a new "shoe" into 2009.

2008 Oct 28 12:08 AM