Why A Strong Dollar Is Bad News For U.S. Small Businesses
Written by Ken Gaebler
The U.S. dollar is surging toward its strongest quarter since 1992 and businesses may soon start feeling the heat. Here's why a stronger dollar may not be good news for small business owners.
The U.S. dollar continues to gain ground against foreign currencies. On the surface, a stronger dollar sounds like a boon for American companies--a byproduct of a growing economy. But there are several reasons why a strong dollar spells bad news for the nation's small businesses.
Why the Dollar Is Strengthening
Over the past year, the dollar has risen by 20 percent against foreign currencies and 27 percent against the euro. Currently, the dollar is on track to experience the largest quarterly strengthening since 1992.
Although the U.S. economy continues to expand at a steady pace, it is still a long way from a boom economy. But compared to Europe, the U.S. economy is robust. Now that Europe's interest rates have dropped even lower than U.S. interest rates, investors are flocking to American markets--a scenario that weakens the euro and strengthens the dollar by driving up demand for U.S. currency.
How a Stronger Dollar Impacts Small Businesses
A strong dollar is generally considered to be a negative scenario for small businesses because it makes American goods and services more costly compared to the goods and services offered by global competitors.
When the dollar is strong, it becomes more difficult for U.S. small businesses to export to European markets and countries where U.S. firms directly compete with European businesses. Conversely, imports become more attractive because they are less expensive relative to goods and services sold by American companies. Essentially, buyers' dollars go farther when they buy foreign products and services.
The stock market recently plummeted on fears that a strong dollar will lead to an earnings decline for U.S. firms. Stocks also reacted on concerns that the nation's low unemployment rate would cause the Fed to raise interest rates in the coming months, a move that could exacerbate the problem by further strengthening the dollar.
For small businesses, higher interest rates would make it more costly to get a small business loan and secure funding for growth and expansion. Combined with the increased competitiveness of foreign businesses, a rate increase could have serious implications for small businesses--effectively slowing down the rebound for a U.S. economy that has finally found its footing.
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