Strong dollar.....is it really good for the US?

Yesterday I was baffled (yet again) by a republican US politician on CNBC who claimed that the current weak dollar was the cause of manufacturing leaving the US, citing his experience from Michigan in the 80‘ies. So while I am that old and I do remember the 80‘ies, twenty-five years is obviously a long time - in the foreign exchange market it’s more like an eternity - and yes my memory served me correctly, the US dollar was anything but weak, peaking at a $/DM rate of around 3.45, which equates to a €/$ rate of 0.635 and only started to weaken after the Plaza accord in 1985.

If anything a weak US dollar helps investment in the US as it makes exports more competitive and imports less competitive, or reduces the profit margins for the manufacturer, which is why that in the last 20 years (ironically since the 80‘ies) BMW, Mercedes, VW, Toyota, Honda and others have opened production facilities in the US, partially as a hedge against a weak dollar, which could render them un-competitve or substantially less profitable in what still is, the wold’s largest market.

So if anything a strong dollar is not good for the domestic manufacturing industry. 

Obviously it has become one of the hot topics in the markets, with the odd politician jumping on the band-wagon, but as many of them are just jumping on the wagon without having done any analysis themselves it’s really rather embarrassing, but hardly new.

The scare mongers are calling for a collapse in the dollar and while I can clearly see the benefits (for the US) in a relatively weak dollar, it’s not beneficial to the Europeans (Germany’s August trade balance was +8 bill vs +12 bill expectation), nor to the Japanese whose export sectors are hurting because of the strong yen. In fact it’s hard to see who, apart from the Americans, it’s good for and while a true collapse wouldn’t be good for the US, it wouldn’t be good for anyone else either.

Oh, but is is inflationary I hear them say, well yes but some inflation is what is called for if the US (and the rest of the western world) is not to experience serious deflation and by the way, inflation is the cure for an overly indebted economy, as long as the economy’s liabilities are a) fixed rate and b) denominated in the same currency as the assets it holds. The US bond market does not seem to be overly concerned about the prospects of inflation and is taking down record issuance without any problem whatsoever, at least so far.

One of the true idiosyncrasies in this partially post-crisis world is the EVERYONE is looking for an export led recovery and clearly that is not possible.

At the moment the markets are hot on the ‘weak dollar stronger everything else trade’, but while there may be a an argument for holding gold against all (paper) currencies, the same does not necessarily apply to oil, base metals and everything else. What I see coming is a fast and furious correction to the weak dollar trade, as it is too heavily skewed in the direction of the weak dollar strong everything else.