The headlines are full of scary reports about the dollar’s rise to a 14-year high against a basket of six major currencies. Its strength will hurt U.S. manufacturing while triggering capital flight from emerging markets, economists say. The appreciation “is a real serious noose around the neck of the global economy,” David Beckworth, a senior research fellow at the Mercatus Center at George Mason University in Arlington, Va., said in November. What’s really alarming, though, is that even though the dollar has jumped 6 percent against the euro and 12 percent against the yen since the U.S. presidential election, it remains well below its historic highs. If its rise to date is causing trouble, imagine how much worse things could get if it went on a serious upward run. The included chart shows how much headroom remains for the greenback. It’s the Federal Reserve’s index of the value of the dollar against a basket of currencies of 26 trading partners, with each one’s value adjusted for that nation’s inflation rate. This is a better indicator of the dollar’s strength than the frequently cited U.S. Dollar Index, which covers just six currencies and isn’t adjusted for inflation. The Fed’s index remains 10 percent below its 2002 high and fully 19 percent below the lofty high of 1985, which led to an emergency international accord to lower the greenback’s value through official, coordinated sales of dollar reserves. Fundamental factors are driving the dollar upward. Because U.S. growth is strong and unemployment low, Fed policymakers are projecting three more quarter-point increases in short-term rates in 2017. That will tend to push up the dollar by making U.S. Treasuries and other fixed-income investments more lucrative. Investors are also betting President-elect Donald Trump will touch off a growth spurt through tax cuts and infrastructure investment. Meanwhile, “The euro zone debt crisis and the travails of the Chinese renminbi have weakened the dollar’s main rivals and cemented its dominance as a key benchmark for other currencies,” Cornell University economist Eswar Prasad wrote in an e-mail. ABN Amro, a Dutch bank with a more extreme forecast than most, projects that the euro, worth $1.15 as recently as May, will be only 95¢ for most of 2017. Trump Gives the Dollar Wings, it headlined a November research report. A strong dollar is bad for U.S. growth, making American goods and services less competitive in world markets. A rule of thumb says that a 10 percent rise in the dollar increases the trade deficit by 1 percent of gross domestic product, and that translates into the loss of hundreds of thousands of jobs, says Brad Setser, a senior fellow at the Council on Foreign Relations in New York. Warnings about the damage from dollar strength have come recently from U.S. companies including Boeing, Emerson Electric, 3M, and United Technologies.
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