Surging Dollar Reflects the Standout U.S. Economy

While weakening foreign fundamentals have pushed money out of those markets, the relatively high interest rates in the United States have exerted a magnetic pull.

Yields on U.S. Treasury bonds — a benchmark for measuring investment returns — are quite low by domestic standards, but they’re downright generous compared with global rates.

The yield on the 10-year Treasury note was about 1.52 percent on Thursday, trouncing the negative yields of roughly 0.04 percent and 0.44 percent on 10-year government bonds from Japan and Germany. (Negative yields effectively mean that lenders are paying borrowers for the privilege of handing them money.)

The strengthening dollar can be a boon for the American economy: It helps lower the costs of borrowing and makes imports cheaper, bolstering already strong consumer sentiment.

But that dynamic can also have negative consequences. Despite the country’s robust labor market, business investment has been shrinking and manufacturing has struggled since late 2018 — and a strong dollar won’t help those parts of the economy much.

American exports such as aircraft, automobiles and soybeans become less competitive on global markets as the dollar rises in value. That, in turn, could weigh on the industrial manufacturers, from the makers of farm equipment to the factories that churn out piping for oil and gas extraction. A slowdown in foreign economic growth will also weaken overseas demand for American-made goods.

“There is no question that the industrial side of the economy continues to suffer the effects of weak global growth, the strong dollar, tariffs and trade uncertainty,” Mr. Schwartz wrote in a recent client note. “Those headwinds are not expected to vanish anytime soon.”

Article source: https://www.nytimes.com/2020/02/20/business/strong-dollar-economy.html