How the Falling Dollar and Rising Exports Affect U.S. Companies

How the Falling Dollar and Rising Exports Affect U.S. Companies

The floating exchange rate systems, which are common for most major economies, cause currency fluctuations. The exchange rate of currencies is determined by various factors including relative supply and demand of the currencies, interest rate differentials, outlook for inflation, economic performance, and capital flows among others. The U.S. dollar exchange rate changes across varying foreign currencies daily. The more the dollar is devalued relative to a foreign currency, the more dollars will be required to get the same amount of the specific foreign currency. When the dollar depreciates, domestic businesses spend more when converting the dollar to a foreign currency. On the contrary, foreign businesses are able to convert their currencies into U.S. dollars cheaply. Therefore, the falling dollar favors exporting companies in the U.S. but harm the multinationals in the long-term.

When the value of the dollar diminishes, U.S. exports become more competitive around the world, thus, raising the export demand. The rising exports will be a boost for the U.S. manufacturing sector, which will experience price competitiveness. The two best examples of U.S. manufacturers are Procter & Gamble and McDonalds. The two organizations have established superior brand recognition on the global scale with innumerable operations around the world. These companies’ generate a substantial amount of their annual sales from their international sales, due to the weakening dollar that favors their exports. The auto industry is also one of the manufacturing sectors that benefit greatly from the dollar devaluation (Glinton, 2011). The effect of the long term devaluation of the dollar is evident in the collapse of many industries during and after the economic recession but the auto industry continues to flourish. The stability has lured numerous automakers around the world, who have made the U.S. their manufacturing hub (Glinton, 2011). Companies like BMW, Honda, Toyota, and Subaru among others are continuously expanding their operations in the U.S. These companies are riding on the success of cheaper costs of exports in the U.S. due to its weakening dollar.

The diminishing purchasing power of the dollar also benefits other industries including biotechnological, technological, transport, apparel, and many others. These companies improve their terms of trade with the outside world due to price competitiveness and increasing demand of U.S. goods. For instance, a U.S. apparel manufacturer that has massive business engagements in Europe would benefit when the value of the euro is strong against the dollar. The company’s profits will accelerate in Euros and when the strong Euros are converted against the weaker U.S. dollar, the American Apparel company will gain more profits. The U.S. manufacturers may also be compelled to raise their domestic prices, hence, higher profit margins. On the other side, a weak dollar, even though generates temporary profits, the reduced purchasing power for the domestic consumers may shift them from multinationals to generic brands, hence, reduced sales for the manufacturer.

 

The U.S. dollar devaluation boosts the manufacturing sector due to the lower costs for exports, hence, increasing demand. Foreign companies and consumers increasingly buy commodities from the U.S. when the exchange rate lowers, increasing sales and profit margins for the U.S. manufacturing sector. In the long term, however, the diminishing buying power for the domestic consumers may lure them to generic brands with cheaper offerings. As a result, the company’s sells and profits would reduce, inconveniencing the shareholders.

 

 

References

EconomicsHelp. (2019). Effects of a falling dollar. EconomicsHelp. Retrieved from https://www.economicshelp.org/macroeconomics/macroessays/effects-falling-dollar/

Glinton, S. (2011). Weak dollar? That’s good for U.S. exports. NPR News. Retrieved from https://www.npr.org/2011/08/14/139611423/weak-dollar-benefits-some-u-s-manufacturers