Market Says Dollar Too Strong; Overvalued Currency a Problem For Washington’s Reshoring Plans (2024)

The market is in agreement: the dollar is overvalued and will likely remain that way all year.

The strong dollar makes it much harder for Biden’s “reshoring” policies to be successful, wrote Steven Blitz, chief U.S. economist and a managing director of TS Lombard, a global macro research firm for investors.

Industries are particularly sensitive to the forex value of the dollar and monetary policy pushes the dollar higher. The tariff response to help domestic industry is a weak tool -- goods flows can be and are redirected. To be clear, tariffs are essentially targeted currency intervention by a different name and a poor substitute for policies that would realign the dollar closer to fair value. When the dollar is strong – it lowers the price of imports and makes foreign production more attractive for domestic producers. The U.S. was a global net buyer of $840 billion worth of goods ex-oil in 2023.

– Steven Blitz, chief economist, TS Lombard, April 23, 2024.

The mainstream economic view is that unemployment is low and the stock market is strong, so the economy must be humming along. But while unemployment levels are comfortable overall, manufactured goods production has failed to return to pre-Covid levels.

CPA’s latest Currency Misalignment Monitor shows the U.S. dollar is overvalued against a broad basket of economies by 15.8%. But on a bilateral basis, the U.S. overvaluation is much worse. The Japanese yen is undervalued by 43.7% and the euro and Chinese yuan are undervalued by 23% and 21%, respectively. That makes it that much cheaper to import a Nissan, a BMW or Chinese solar panels, than it is to make them here. Other than labor, raw materials, tax and regulation, currency is an important factor used by corporate investors in determining where to buy, and where to invest long-term.

Trump weighed in on the dollar on Tuesday, calling out the differentials between the dollar, yen and yuan. He said it was a “disaster for our manufacturers and others.”

By “others” he might mean agriculture producers.

Last week, USTR Katherine Tai met the ire of farm state Senators complaining about the lack of “market access” and free trade agreements. She told Senator John Thune (R-SD) that the dollar made it harder for U.S. producers to sell abroad, regardless of market access privileges.

In particular, the Senators complained about tariffs of around 50% for U.S. beef in Thailand, which competes against Australian and New Zealand beef. Those two countries have no tariffs when selling to Thailand. But even if tariffs were removed, U.S. beef would be roughly 50% to 60% more expensive than Australian and New Zealand beef based on dollar rates alone.

Goldman Sachs predicted on April 23 that the dollar will remain “stronger for longer.”

Bloomberg reported on April 21 that the overvalued dollar was “here to stay” further complicating tariff policy.

Much of the demand for the dollar is due to a better economy than other investment source nations with big, investable markets – namely those in the EU, Japan and China. Global investors buy U.S. securities over their home market. Chinese capital is restricted from leaving its home market, but because China is our biggest source of imports, Chinese companies (and its central bank) are big holders of U.S. Treasury bonds. Demand for American stocks and bonds drives up the value of the dollar.

“The dollar is overvalued by a large double-digit margin against most major currencies, due to the growing conviction that U.S. interest rates will be higher for longer, while other central banks like the ECB are getting close to cutting rates,” said CPA chief economist Jeff Ferry. “As the world’s preferred reserve currency, demand for dollar assets continues to rise, putting industrial and agricultural producers at a serious disadvantage.”

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