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US Exporters and Strong USD

February 1, 2015

While the Eurozone is struggling with all sorts of problems, the United States on the other hand is doing very well. Last Friday we all witnessed that the 4th quarter growth in US was a healthy 2.6%. Clearly it is lower than previous quarter 5% but nevertheless, there is no reason to panic, at least not yet.

The moment of truth comes when we get the first quarterly results from this year because there we should see the effects of a strong dollar. US exports were already lower in the 4th quarter but we need to wait a bit more to see how much the appreciation of US dollar actually hurts the overall growth.

Big US exporters are already feeling the pain caused by the higher USD but in the long-run their problems are only beginning. If the FED really plans to hike rates this year, and currently it seems that they will hike, then USD is going to fly to the moon.

The largest trading partner of the United States are Canada, China, Mexico, European Union, Japan and Germany. While the FED is planning to tighten their monetary policy, Bank of Canada just lowered the rates, Bank of Japan is still running its massive QE and European Central Bank is about to lauch its version of QE in the Euro area – so I guess you can see how the majority of central banks are moving totally in the opposite direction from the FED’s point of view.

Right now, the reality for US exporters looks like this:

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When the FED hikes the rates, then all of those chart are going to change significantly and the direction of the USD is not going to be favorable for the US exporters.

What the FED desperately needs to see is a decent wage growth in the US but unfortunately so far it has not happened. The best bet to keep the US economy expanding is through consumption but if the salaries stay as they are or grow very slowly, then sooner or later, the strong USD becomes a real problem for the US growth.

Capital Properties FX
01.02.2015
Kaarel.