Countries Most Affected By A Strong U.S. Dollar

Investors are gaining confidence in the U.S. economy. Consequently, the U.S. dollar has been strengthening relative to most major currencies in the world. This article explores the effect of a strong and rising dollar on emerging economies, such as Brazil, India and China; oil-exporting countries, such as Russia and Saudi Arabia,the eurozone and home.

The U.S. dollar is the most important and trusted currency in the world. Most international trade is conducted in dollars, so its value has a significant and direct effect on the international trade of most, if not all, countries. Major commodities such as gold and petroleum are quoted in U.S. dollars on the international market. The dollar is also the foremost reserve currency in the world. It represents the largest percentage of foreign reserves held by global governments and private institutions. In fact, the majority of U.S. banknotes are held outside the United States and by non-residents—such holdings are called eurodollars.

The current surge in the U.S. dollar was first catalyzed in 2009 when the Federal Reserve (the Fed) began the largest program of quantitative easing in economic history. The U.S. central bank printed money to buy up bonds to stimulate the recession-deadened economy. It managed to add $3.5 trillion to its balance sheet. This resulted in an excess supply of dollars on the international market.

The money the Fed pumped into the U.S. economy found its way into emerging markets with a promise of better growth and higher interest from their fixed-income instruments. The dollar's value thus dropped relative to most currencies in the world. In October 2014, the Fed decided to end the quantitative easing program, shutting of the spigot of dollars. This, coupled with an expectation of a U.S. interest rate hikes, has sent the dollar soaring against most currencies.

A strong U.S. dollar abroad has an impact at home. U.S. consumers enjoy cheaper imported goods and lower oil prices--most Americans will see greater discretionary income. A strong dollar also slows inflation which gives the Fed more leeway to continue with an expansive monetary policy (increasing the supply of money without worrying about inflation in the near term). This is likely to further spur economic growth.

However, a strong U.S. dollar is a double-edged sword. Just as foreign goods become cheaper at home, American-made goods will become more expensive abroad, and some exports will no longer be competitive on the international market. Exports will likely see a dip, which will affect U.S. companies who rely on revenue from international markets. According to USA Today, large U.S. companies rely on overseas markets for approximately half of their sales, particularly those in the technology, energy and heavy equipment manufacturers sectors. (Read more: How A Strong Greenback Affects The Economy)

In Latin America, emerging economies like Chile, Brazil, and Venezuela will suffer under a strong U.S. dollar. These countries are commodity exporters. The international markets price commodities in U.S. dollars, and a strong dollar will make commodities dearer for other countries. With less demand, the price of commodities will fall. In Chile, the price of copper (which makes up over 40% of the nation’s exports) is declining. However, countries that are net importers of oil may be able to make up the difference by saving in oil. As a commodity, oil prices also decrease with a rising dollar. (Read more: How A Strong U.S. Dollar Can Hurt Emerging Markets)

In Asia, emerging markets India and China are net importers of both oil and commodities. Because economies that import commodities benefit from the cheaper commodity prices brought about by a strong dollar. India and China will also benefit from increased demand for exported manufactured goods as the rising dollar increases how much U.S. consumers can afford to buy.

However, China is exposed to $1 trillion of non-bank borrowing (borrowing from non-bank financial institutions). These corporations are going to find it hard to repay the debt as the dollar gets stronger because it will take more of the yuan to pay off the same debt. For example, a $1 trillion debt when the U.S. dollar and Chinese yuan exchange rate is 1 to 6 will cost $6 trillion yuan to pay off. The U.S. dollar has grown stronger (1 dollar was 6.94 yuan as of October 2018), so the same debt now requires $6.2 trillion yuan to pay off. It is a grim scenario as China is also dealing with it's own economic slowdown due to a decreasing global demand for Chinese goods. 

Russia and the major oil exporters in the Middle East including Saudi Arabia, Iraq, and Iran are all facing the repercussions of a strong dollar as it pushes oil prices down. The Organization of Petroleum Exporting Countries (OPEC) has not responded as it normally would by cutting supply. OPEC is hoping that by glutting the market with oil and pushing prices down, it will capture a larger market share. The lower prices will make a huge dent in trade accounts of most oil exporting countries. The currency of these countries will also fall relative to the U.S. dollar. For example, the Russian ruble is experiencing a precipitous decline relative to the dollar.

Countries in the eurozone are negatively affected by a strong U.S. dollar. In 2015, a quantitative easing plan was initiated by the European Central Bank (ECB). The central bank purchased bonds worth 60 billion euros a month for a total of 720 billion euros to kickstart the eurozone's stagnating and deflationary economy. Since then, eurozone activity has accelerated, and some estimates suggest that quantitative easing contributed 0.75% to the average 2.25% annual growth rate. A strong U.S. dollar is also good for tourism in Europe as more Americans, lured by a weak euro, will vacation in Europe. 

The U.S. dollar exerts great influence on the world economy. With the dollar set to rally over the next few years, many countries will be caught up in the wake. The effect of a strong dollar will differ for countries depending on each nation’s economic structure and policies.