The incoming administration of Donald Trump may find itself faced with a bit of a real challenge.
With campaign promises to increase US manufacturing and reduce imports, those goals will be much tougher to achieve if the US dollar continues to rise against the Chinese Yuan and other currencies.
The US currency, which has strongly appreciated over the past two years, surged to a 14-year high against a basket of foreign currencies in the wake of Donald Trump’s election and the Federal Reserve’s decision to raise interest rates.
In general, a strengthening dollar is a threat to US manufacturers by making their exports more expensive and their foreign earnings less valuable. So while a rising dollar is a sign of confidence in the US economy in the wake of the Trump election victory, the move makes it harder to turn the tide of ever rising imported goods.
The chart below, recently published by the Wall Street Journal, shows one estimate of the impact of a 10% increase in the value of the dollar starting in 2017 over three years.
Source: Wall Street Journal
For example, this estimate says such a rise in the dollar would lead to a 3.6 percentage point decline in US manufacturing output by 2019, with growth shrinking from an estimated 5.1% to just 1.5%.
GDP growth over the next three years would drop 1.8 percentage points to 4.5% from the previous estimate of 6.3%,
Imports would actually rise 3.6 percentage points.
The strong versus weak dollar argument has been around a long time, and this simply adds more fuel to the fire.
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