The Federal Reserve interest rate rise, only its second rate increase in the last 10 years, came as no surprise last week, following months of leaked intentions.
Unexpected, however, was the clear indication that we can expect three more similar rate increases through 2017, effectively doubling US central bank interest rates over the period.
For Americans, the rate increase is an attempt to cool the economy and prevent excessive inflation next year, a smart move from Janet Yellen, the head of the Federal Reserve, particularly in view of the Trump-led expansionary policy plans.
However, her statement to increase rates three times in the coming year could cost her the job as it will inevitably push up the dollar to even greater heights.
The downside of strengthening the dollar is that it makes US exports less competitive abroad and pushes down the cost of imported goods, something President-Elect Donald Trump has vowed to address in his drive to ‘Make America Great Again’ and, in the process, bring home jobs again.
For Ireland’s exporters, a rising dollar has been good news and the expectation of more rate rises through 2017 pushing the dollar to new heights, is even better news.
The US currency has been rising against the euro for the past two years. Against the euro, there has been a massive 23% gain by the dollar since the middle of 2014, which has fed through into making Ireland’s exports much more competitive — not alone on the US market, but also right across Asia, including China where the Yuan is pegged to the dollar, and on across Africa where the US currency is the main trade of choice.
As approximately 40% of all exports from Ireland are sold in dollars, the rapid rise in the value of the currency against the euro has made manufacturing plants in Ireland very competitive, not alone when selling back into the US and into regions outside of Europe, but it also makes it cheaper for US corporations to employ staff in Ireland than return work to the US.
The strengthening of the dollar has been the main reason Ireland’s exports have held up over the past few years in the face of the sluggish eurozone demand and, more recently, the negative impact of the Brexit decision.
The trading advantage has been witnessed most in the 50% rise in exports to the US from €19.8bn in 2014 to an estimated €30bn this year.
Waking up the morning after the rate rise, central bankers across the globe knew that they are now facing a paradigm change following the Fed’s announced strategy to raise rates three more times during next year and to do the same again in 2018.
The low interest rate era may be moving into the rearview mirror in the US, but will the ECB respond, and what of the Bank of England, where Governor Mark Carney is caught between trying to stimulate the economy with low interest rates and keep British exports competitive.
Higher interest rates in Ireland would spell disaster for many small businesses, who are still paying off over-valued legacy assets. However, for many, higher interest rates are acceptable if international trade is buoyant.
Ireland’s exporters will probably now be rooting for Donald Trump, not because he saved Doonbeg golf course, but on the basis that his stimulus package for the US will work, pushing up global trade growth.
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