OECD: The strong US dollar is a huge drag on US growth and corporate profits


The US dollar has been extremely strong over the past 12 months, both against individual currencies like the euro and yen as well as more broadly.

There have been some very big moves according to the OECD’s latest Economic Outlook and the result has been that “the real effective exchange rate of the US dollar has appreciated by nearly 10% since mid-2014 and slightly more in nominal terms”.

Source: OECD

That’s important because even though Fed policy and domestic interest rates get all the headlines, currency levels and currency movements also play a role in determining the monetary settings in the US economy.

That means that the US dollar’s strength has “contributed to a tightening of financial conditions in the United States, while the opposite holds true in the euro are and Japan.”

While on the one hand a stronger US dollar helps dampen inflation in the US the major, and troubling drag on the economy, is that it transfers growth from the US to other nations.

“The recent exchange rate changes will affect the volume of exports and imports and reallocate demand from the United States to the euro area and Japan,” the OECD said.

In the end it means the US economy will experience lower growth due to “the losses in market shares of US exporters and an increase in import penetration.” The OECD estimates this will lead to a “cumulative negative net export contribution to growth over 2015 and 2016” of around 1.25%.

The impact of that lower growth is going to be felt by US companies with the OECD noting that “The appreciating US dollar has also dampened the earnings of US companies with large foreign operations, with implications for their equity prices. Nearly 40% of the total profits of S&P 500 companies come from abroad.”

The US dollar’s appreciation has been great for spreading global growth beyond the shores of the United States. But it is also complicating the outlook for the Fed, US companies, and the stock market.

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