Readers following contemporary economic and financial events will know that the greenback is currently on an amazing upward trajectory. In just the last few months, it has strengthened against virtually every major currency in the world; its strength against the euro and the Russian rouble has made the national news. Against the dollar, the euro is trading at a nine-year low and relative to even August 2014, the rouble has lost almost half its value.
What does this seemingly enviable state of affairs mean for the Rochester economy?
Producers or firms in the Rochester area whose operations are purely domestic will, for all practical purposes, be unaffected by the strong dollar. However, the story is quite different for those engaging in any kind of international activity. Given the recent appreciation in the U.S. dollar, firms that export will be adversely affected because foreigners now must pay more for these exports and hence the demand for these products will typically decline.
In contrast, Rochester-area producers who import raw materials and/or other goods will find that these imports now cost less than they did before. Hence, if they so wish, these producers will be able to buy more of these imports. The extent of both—the decline in export demand abroad and the increase in import demand in the Rochester area—will depend fundamentally on what economists call the price elasticity of demand.
An additional implication of a strong dollar is the impact that it typically has on the earnings of Rochester-area firms with substantial foreign operations. For such firms, an appreciating dollar is not a boon because a stronger dollar reduces the dollar value of foreign sales and hence diminishes earnings. Fortunately, the twin facts that the U.S. economy is demonstrating solid gross domestic product growth and that interest rates remain very low are effectively countermanding the negative effect of the currency-exchange trend.
A final effect of the strong dollar—particularly its rise relative to the euro and the Japanese yen—is that it tends to exert downward pressure on inflation in the United States and, indirectly, upward pressure on inflation in Europe and Japan. This lower inflation is welcome news for both producers and consumers in the Rochester area.
Rochesterians thinking of traveling to exotic foreign locales will benefit greatly from the strong dollar. For instance, Neil Irwin reported recently in the New York Times that European destinations are now 12.5 percent cheaper in dollar terms than they were just six months ago. Figures such as this one ought to make a European vacation a rather attractive proposition. However, a potential downer is that Rochesterians with family members residing abroad will find it more difficult now to persuade them to come here for a visit.
Producers and consumers in the creative, international economy that is Rochester are affected by the value of the U.S. dollar in particular and by changes in exchange rates more generally. Indeed, it is fair to say that sound financial decision-making by both groups depends on their comprehension of the nature of these changes.
Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology. These views are his own.
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