The Federal Reserve Bank stopped buying US Government bonds in October of last year. Ironically as we have completed our QE program, Europe is beginning their own. With an eye no doubt toward the relative economic recovery in the United States, the ECB has announced they will begin buying bonds to keep interest down in Europe to help stimulate the economy. Because China, Japan and most of the remaining world is also pursuing loose money strategies, the US dollar has increased in strength.
Aside from helping US tourists, how does the strong dollar affect our economy?
Corporations
Large US based companies that rely on exports to fuel their revenue will likely see a decline in sales as foreign buyers of their goods will see the cost rise. This decline in sales will likely lead to lower profits. Conversely, smaller companies that rely predominantly on domestic demand will see their prices remain stable. Because many of these companies import their parts, they should see their overall costs decline and their profits increase.
Investors
A stronger US dollar could lead to an influx of foreign investment, particularly in our US government bonds. . When investors are paying Switzerland for the privilege of lending them money for ten years and Germany is paying 0.25% for their ten year notes, a US government ten year note at 1.80% has appeal. Therefore, I believe until the global economy picks up speed, interest rates in the United States, particularly long term interest rates, are likely to remain low.
Savers
We believe this group of people will continue to get the short end of the stick. Although many investors believe the Federal Reserve Bank may raise the federal funds rate later this year, the rate hike will likely be very gradual and measured, according to chairperson Yellen’s recent comments. Banking clients and CD investors will likely suffer through interest rates below 2% for quite some time.
Conclusion
We are on the long, slow road to recovery. However, the problems in Europe and Asia are likely to make our recovery longer and slower than it otherwise would have been. The consolation is we are likely to experience a longer recovery as a result.
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