Question

In January 2015, several large multinational corporations announced lower than expected earnings for the fourth quarter of 2014. Many blamed the monotonous profits on a strong dollar. How does this work? When the dollar gains value against foreign currencies, why does it hurt U.S. exports? How could this affect the demand for dollars and ultimately affect the exchange rate?

Answer 1

A stronger dollar will make the exports of American economy expensive and thus reduce exports of American industries. This fall in the exports reduces sales of large multinational corporations and thus reduces their profits. This leads to lower than expected earnings for the fourth quarter of 2014.

When dollar gains value against foreign currencies, it leads to appreciation of dollar vis-a-vis foreign currencies. This makes the exported goods from America expensive as compared to the exports of other nations and also as compared to the domestic goods of the nation. Fall in exports will reduce overall Net Exports and thus shift the aggregate demand curve of the American economy leftwards leading to fall in the level of National Output in the economy. Thus, overall economic growth rate of the nation falls with appreciation of domestic currency.

This will reduce the demand of dollars as exports fall, people will demand less number of US dollars and thus demand curve of dollars will shift leftwards. This leftwards shift of the demand curve of dollars will lead to depreciation of dollar with respect to foreign nations.