Will the U.S. Economic Recovery Be Snuffed out By the Strong Dollar?

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By Jacob Maslow

shoveling up 100-dollar bills
Pile of 100 dollar bank notes

When Procter & Gamble (NYSE:PG), the large multinational personal care products corporation, released its earnings figures, it raised a lot of eyebrows. It also raised the alarm as to the damage a strong dollar can pose to corporate profits. Based on Procter & Gamble’s last quarterly figures, its profits dropped by a whopping 31%. It is blaming all of this on the runaway appreciation of the U.S. dollar.

Procter & Gamble is a global company. It has penetrated so many markets, and it is very vulnerable to the strong dollar because its currency base is the U.S. greenback. This is a problem if the dollar is so strong that dollar-denominated products from U.S. companies look expensive. That is the bottom line. Procter & Gamble’s consumer products look expensive compared to local players. Not surprisingly, many consumers would rather buy local products instead of an American brand because of the American brand’s higher price.

At least, this is the public story that Procter & Gamble is saying. I don’t really doubt this because the U.S. dollar has appreciated quite a bit against 16 major currencies, ranging from the South Korean won all the way to the Swedish krona. However, Procter & Gamble might not represent the vast majority of multinational players out there. You have to understand that Procter & Gamble is consumer products, meaning there is a lot of price sensitivity. If you are in the market for shampoo, you can be quite sensitive as to the price.

However, there are other products out there where you are willing to pay a premium because of the perceived quality, as well as the brand. I am, of course, talking about Apple (NASDAQ:APPL). I suspect that, depending on the particular market an American multinational company is in and how it is positioning itself, a strong dollar might not be that big of a factor. Still, the strong dollar affects so many American companies that it might lead to layoffs that would throw the American recovery off-track.

I am quite tentative in saying this because the U.S. economy is like a balloon. It is really too simplistic to think that just because you push on one end, everything will implode. It doesn’t work that way. In many cases, if you push on one end, it might even have a positive effect on the other, or there are compensating factors at play. Still, the U.S. dollar will put negative pressure on the U.S. recovery. It is definitely one headache government economists need to worry about.

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