Why A Strong U.S. Dollar May Hinder Economic Growth Going Forward

|
Includes: FORX, UDN, UDNT, USDU, UUP, UUPT
by: Discount Fountain

Summary

While consumer spending appears to be rising in Europe, the export potential of the United States is hindered by a strong currency.

Lower than expected retail sales may cause economic growth concerns going forward.

As a result, the Federal Reserve may be more likely to delay rate rises until September.

Recently, the U.S. Treasury Department had outlined concerns that Europe is over-reliant on the export market to boost economic growth, and growth should be driven more by domestic demand in order to ensure sustainable growth. While I agree that domestic demand is an important driver of sustainable growth, the United States is wary of a weaker euro bolstering exports and posing competition to America's markets in this regard. However, I argue that exports are not in fact driving growth in the Eurozone in spite of a weaker euro. Ultimately, a strong dollar hinders export potential in the United States and a reversal in the USD may be needed going forward to combat economic growth concerns.

Firstly, we can see that exports across both Europe and the United States in fact weakened in the latter half of 2014 - the weakness in the euro currency versus the dollar did not make a difference. Additionally, we see that consumer spending has been broadly rising in both economies.

Sources: Trading Economics

Additionally, a strong US dollar is not helping imports, with imports dropping quite dramatically since the beginning of 2015, which is very surprising given a strong domestic currency. Given reports of lower than expected retail sales, there is the growing concern that domestic demand in the United States is not as high as previously thought.

Sources: Trading Economics

While I have previously argued that deflation is a risk factor for the Eurozone, this type of deflation does not appear to be of the "bad" variety as consumer spending is still rising across the Eurozone. Domestic demand does appear to be rising in Europe, but this is not having positive effects on the United States as a strong currency is hindering exports. I would argue that while domestic demand in Europe is rising, this is not translating into increased growth in the United States as the USD remains at too high a level.

In conclusion, while it is hard to call where the USD will go next, I argue that a strong dollar may in fact start to hinder growth potential in the United States. In this regard, it may become more likely that the Federal Reserve will postpone rate rises to the month of September, and we could potentially see USD depreciation going forward.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.