Trump’s proposed economic plans are predicted to be a boost to growth and inflation. But a consequence of this is the soaring dollar, which make U.S. manufacturers’ goods expensive abroad, and this is already hurting U.S. exporters even as President-Elect Trump pledges to boost factory jobs. Caterpillar Inc. (CAT), Harley-Davidson Inc. (HOG), Kaman and other global companies are bracing for rivals to exploit the high dollar by lowering their prices and grabbing market share. The rising dollar, which is at 14-year highs against other major currencies, may end up backfiring on Trump’s economic plans. (For more, see also: How Trumponomics Might Boost the Stock Market.)
The Dollar and U.S. Exporters
In a global economy, many large U.S. companies rely on world markets to sell their goods and services. As the value of the dollar rises in relation to foreign currencies, it makes exports more expensive and imports more attractive. For example, when $1 is equal to €1, a $30,000 Ford and a €30,000 BMW cost the same to an American buyer. If the dollar strengthens 10%, the BMW would cost just $27,000 in the U.S., making it more attractive. At the same time, it would cost equivalently €33,000 in Europe, making the BMW also more attractive abroad.
Ironically, the currency hit perhaps the hardest since Trump’s electoral win, the Mexican Peso, has led to some benefits for Mexico already. According to Bloomberg, “Mexico surprised economists by posting a trade surplus in November as a weaker currency spurred demand for the manufacturing exports that President-elect Donald Trump wants to impede.” This has led to an improving trade balance in Mexico, which is likely to continue if deals such as NAFTA are scrapped, further weakening the Peso. (For more, see also: Trump and the Mexican Peso Opportunity.)
Similarly, the Wall Street Journal reports that China’s currency, the Yuan, has fallen to its lowest level against the dollar in almost a decade, a situation that could incentivize manufacturers to keep factories domiciled in China instead of bringing some operations back to the U.S. It could also make Chinese exports more attractive in the U.S. and on the world market as American manufactures will be hard pressed to compete on price as well as currency effects. (For more, see also: How Will Trump’s Policies on China Impact U.S. Business?)
Kaman, a New England-based manufacturer of aircraft parts has seen its edge versus European competitors fall recently. The company’s CEO has gone on the record saying “manufacturing here in the U.S. has become a lot more challenging than we’d anticipated.”
Still, Trump and his economic advisors plan to counter a rising dollar’s effect on exporters by imposing stiff import tariffs and also claim that the inflationary pressures in the currency will be outmatched by real economic growth and productivity gains.
The Bottom Line
Trump’s economic plans have boosted the dollar’s value to multi-year highs against foreign currencies as investors see growth ahead. However, the rising dollar is already hurting exporters while at the same time boosting sales for overseas manufacturers, and particularly those who Trump blames the most for taking U.S. jobs— Mexico and China. Tariffs and growth in the real economy may end up off-setting the currency effects, but only time will tell.