Beware the Soaring Dollar

In Greek mythology, Sisyphus the king of Ephyra (Corinth) was condemned by the gods to spend eternity rolling a huge stone up a hill only to see it roll down and have to start all over again. As a lifelong advocate of U.S. manufacturing, I can only sympathize with Sisyphus. It does seem like every time we get that stone moving something comes along to knock it back down the hill again.

Of late, it really has seemed like manufacturing was at long last on the rebound fulfilling its potential. Since the bottom of the recession, manufacturing has been expanding at an accelerating clip, leading the overall economic recovery and creating more than 700,000 jobs.

But the soaring dollar is beginning to rain on the manufacturing parade. For many years, U.S. manufacturing has been struggling to compete with nations that engage in currency manipulation, subsidize their domestic industries and discriminate against U.S. exports. We have survived by embracing advanced technologies, becoming more competitive and investing in innovation. But just when it seemed we were turning the tide, along comes this surge of the dollar that is rapidly making U.S. exports more expensive and imports cheaper.

There are many obvious reasons why the dollar is so strong. Our economy is at last emerging from a seemingly endless recession while other nations lag behind. The U.S. is seen as an island of stability in an uncertain world. And of course the dollar is the foundation of the world's economy and is used to define the value of basic commodities -- such as oil.

But a high-flying dollar is bad not only for manufacturing but also the overall economy and indeed the world economy. In effect, it serves to limit monetary policy, tighten credit and stifle exports. The stock market is running scared because the soaring dollar threatens to crush earnings. Our economy has been doing relatively well of late, but it cannot for long accommodate the chaos wrought by the soaring dollar.

All of this is a delayed reaction to the Federal Reserve's quantitative easing policy that has had a profound impact on world markets, particularly for emerging countries. Companies in developing countries have borrowed in the U.S. at low interest rates and are now being squeezed because they have to pay back their loans with a higher priced dollar. In the current atmosphere, the Fed finds itself between a rock and a hard place. If it makes any significant increase in interest rates it will serve primarily to slow the U.S. and the world economy.

Though they made no specific reference to the dollar, it is clear from the Fed's statement and Janet Yellen's comments that the major economic variable affecting the U.S. and global growth is the weakening of the economy which is largely caused by the soaring dollar. A major cause of the soaring dollar has been the Fed's indication that it would raise interest rates this summer. Wisely, the Fed has recognized the harm done by the soaring dollar and its statement is in fact a subtle gambit for talking down the dollar. I doubt that the Fed will be raising interest rates anytime earlier than the fourth quarter of this year.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. March 2015