Dollar Strength Will Affect Minnesota

(KNSI) – The United States dollar is at its strongest level in decades. College of Saint Benedict Economics Professor Louis Johnston says it is because the Federal Reserve has begun hiking interest rates before the European and Japanese central banks.

The foreign currency market sees over $6 trillion traded every day. It is far larger than the bond market, which is signficantly bigger than the stock market. When the dollar takes off versus its peers, it has consequences.

Already, American companies are trying to offset the fact that when they sell a product in major markets like Japan or Germany they are getting less revenue from it. Apple is hiking the cost of its latest iPhone by as much as 19 percent in Asia.

Johnston says Minnesota will feel the effects too. “The big one that jumps to mind with me is that it makes Minnesota exports of iron ore products, so taconite and enrich taconite and things like that…it makes it more expensive relative to importing those products and so that could affect the Iron Range, definitely.”

He adds that the dollar’s move will show up overseas first, and it could be enough to cause a recession abroad. He uses oil to explain why it is a problem. “Things like oil, which is priced in dollars…so even if the price of oil doesn’t actually go up the value of the dollar going up means that you’re going to need more euros to buy a barrel of oil.”

Johnston says we not see a new version of The Plaza Accord, a 1985 agreement where central banks artifically devalued the dollar against the Yen and the Deutsche Mark, Germany’s currency at the time. He does believe that central bankers are routinely hosting phone calls and other meetings to monitor the potential consequences from the dollar’s historic strength.

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