Tuesday, May 19, 2015

Global Economy Feeling the Effects of America's Powerful Dollar

4/13/15 - Over the past nine months, the value of the dollar has increased dramatically, and Americans are loving it. While the average person is now able to get much further in other countries with the same amount of money as in previous years, Tom Petruno's L.A. Times article predicts that the dollar's raised value will have negative repercussions for the global economy and even the American economy in the long run. Devaluation of currency is becoming a trend around the world, and that will be bad for everyone.

The value of a euro has decreased by 25%, now at just $1.09, from $1.37 a year ago. In countries that don't use the euro, the difference is even greater: 30% in Sweden, 40% in Brazil, and 61% in Russia. This causes more Americans to change their vacation plans, leading to a preference for foreign, rather than domestic, travel destinations. While this is helpful in providing revenue for other countries, American tourist destinations like California and New York find it harder to bring in foreign visitors, as costs are rising from their perspective.

Petruno's research shows that the rising value of the dollar may not be due to an improvement in the American economy, but rather a devaluation of comparative currencies. When the currency of a country lowers in value, prices of goods go down, which causes consumers to purchase more of these “on sale” goods. Petruno believes that this phenomenon of devaluing currency is actually being assisted by federal governments in an attempt to increase demand and aid economic growth. Unfortunately, if this continues, each country will have to devalue their currency more and more to compete with each other, and America will be one of the only consumers in a sea of low prices, which will in turn harm the selling power of American companies.

Fortunately for Californian companies, a large amount of foreign investment comes from China. Since the value of China's currency has remained relatively steady compared to that of the dollar, Chinese tourists to the L.A. area have maintained a consistent degree of purchasing power. U.S. imports are up, and although the costs for these imports have lowered, more importing means less investment in domestic production.

U.S. companies lose money by reduced competitiveness against foreign companies, but more immediately, lose money due to the conversion factor between currencies. As the dollar's value goes up, and the value of foreign currency goes down, American companies are forced to accept less money from a sale than would have been earned previously. However, this has a lesser effect on the American economy as a whole, since the U.S. economy does not rely heavily on exports.

Although the value of the dollar is up, businesses are making less money because of the aforementioned competition and reduced foreign sales. Because of this, quarterly earnings are down, and stocks may begin to plunge because of it. Even in the European stock market, which has been on the rise, American investors receive reduced returns on their investments as the falling value of the euro removes some of the value of the stock.

Petruno concludes that the devaluation game is a slippery slope. Best-case scenario is that demand will move to other countries, improving the global economy without hurting American companies enough to start another recession. Worst-case scenario is that the currencies will be forced into a downward spiral, leading to debt defaults by foreign governments and leading to trouble in the economies of every country. Devaluation is a wild card, according to Petruno, and it can be difficult to predict exactly what will happen because of it. He concludes that it all may come down to whatever China decides —whether to give in to devaluation or keep up the value of its currency.

Find out more about us at www.sepulvedaescrow.net. Any Questions? Contact our Escrow Expert! Sepulveda Escrow Corporation (818) 838-1831. Follow our company on FacebookTwitterLinkedIn, and Google+.

No comments:

Post a Comment