Question

What are some of the more significant risks to US-based multinational companies given a stronger dollar?

Given the current environment in the US, what particular companies are most at risk?

What is your recommendation regarding policy affecting the dollar?

Lastly, how likely is it true that a weaker dollar could lead to higher inflation in this environment?

Answer 1

· With the strong dollar the company which export goods and services to other countries their services will become costlier and with the rise in cost the demand for their services might fall in the coming year. The major risk with the dollar becoming strong in comparison to the other currencies that export oriented companies may face fall in the demand of their product because of the relative fall in the value of the currency of the other countries. Their manufacturing cost will increase and profitability might fall because of fall in demand hence reducing net income.

· Given the current environment, the companies which are export oriented specially to emerging markets like Asia, Africa and developed countries in Europe. The manufacturing companies might also be at risk because of the rise in cost of manufacturing of goods and services. These types of companies are at risk because of the rise in the value of dollar the relative purchasing power of these country currency will fall and so will the demand from these countries.

· Because of sudden global turmoil in the financial market and the spread of disease, the dollar is often seen as a safe investment in these times and the demand for dollar increases hence it would be optimal to say that federal reserve needs to increase the supply of dollar currency in the market. When the demand is matched with the supply of funds in the market, dollar will probably find an equilibrium level of balance where the side effect of these will reduce.

· It is true to at certain extent that a weak dollar might cause the inflation to rise but the effect of weak dollar on the inflation is not too much and with the federal reserve intervening in the market from time to time and the history of inflation in the last 10 to 20 years, weak dollar might not be a bog danger for the inflation. A mild inflation is good thing for the overall inflation.