The U.S. Dollar’s Impact on The American Supply Chain

Learn why the value of the dollar is rising and how it effects global supply chains

The value of the United States Dollar is at its strongest point in two decades. Experts believe that it will continue to rise. As it strengthens, there will be winning and losing markets and economies around the globe. Its current ascent not only endangers a rebound in American manufacturing, but also impacts the global economy. When the U.S. dollar becomes more valuable, foreign-made goods become cheaper to import, American made products become more expensive for foreign buyers, and the supply chain becomes more costly to manage.

The Current Picture: High Value U.S. Dollar and the Global Supply Chain

While the impact of a strengthening United States Dollar has not been seen throughout the supply chain, as shipping and labor costs continue to rise, the decreased cost of imported goods may not bode well for U.S. supply chains.

Here is a look at the current economic picture:

During COVID, the global demand for goods has been continually strong. It now exceeds pre-pandemic levels by a significant margin.
An unprecedented amount of financial stimulus was injected into the global economy.
With the exception of high-income households, consumers tended to dip into their savings at a higher level than normal and continued to spend during the pandemic.
During the period of quarantine, consumer spending was primarily concentrated on the purchase of goods most notably of household products, electronics, and construction materials rather than on the service sector, including restaurants and travel.
This uptick in demand occurred at a time when the worldwide incidence of COVID was high. Around the world, countries were limiting travel and shipping. This impacted the global transportation and logistics of goods.
Supply chain bottlenecks appeared, fueled by the global shipping container shortage.
As companies furloughed workers from manufacturing jobs, dealt with limited production runs or were otherwise impacted by shutdowns and social distancing, the effect on global trade became amplified. Production of goods slowed. Orders became increasingly harder to fill. Shipments across global supply chains were notably affected.
U.S. container imports have noticeably slowed to near pre-COVID levels.

So here we are today. The U.S. dollar remains high, making the cost of American made products more expensive than that of foreign goods. This week it was reported that shipping costs are coming down. Whereas shipping from Asia to the Port of Los Angeles had reached precipitously high levels exceeding $20,000, it was reported to have fallen to $2,500.

The value of Chinese exports and other foreign made goods continues to rise. At this point, we are in peak season for seaborne trade, however American consumers are showing signs of diminished spending due to inflation and a trend towards spending on services including travel. There was a major surge in shipments this year from May to July and this dropped a bit in August. Now container lines have an excess of capacity. The drop in global demand, ease of port congestion and decrease in freight rates is signaling a major shift.

No longer are Chinese exports growing at the rate of 30 percent as they did last year or even at the 13.5 percent rate of the first eight months of 2022.

Manufacturing facilities in Asia and Europe have been scaling back production. This is providing somewhat of a respite to crowded shipping schedules and has been attributed to helping to clear port congestion.

Does the Value of the U.S. Dollar Impact Modern Supply Chains?

You bet it does.

Let’s start at the beginning. The concept of the traditional supply chain begins with production. Raw materials and supplies are sourced and procured then used to manufacture finished products. These materials and supplies may be sourced from companies in other countries where they cost less.

We live in a world rife with uncertainty, backlogs, and stress. Over the past two years, companies were unable to fill orders due to inability to produce or transport goods. Because raw materials used to manufacture finished products are frequently transported from one country to another, the relationship of currencies is a critical issue. As the dollar is high relative to other currencies, American companies can reduce costs by importing raw materials.

The price of many commodities has come down. Lumber, steel, aluminum, and plastic have dropped. Unfortunately, increased labor and fuel costs tend to offset those gains.

For years, the U.S. and other nations have relied on globally fragmented supply chains that have proven to be extremely long and vulnerable to disruption. Over the past three years, consumers and businesses have complained about shortages of a range of goods from electronics such as mobile computers due to lack of semiconductors to ocean-going shipping containers, which are used to transport a wide range of goods internationally.

In rebalancing supply chains, it is necessary to stimulate demand for American-made goods by making them more price competitive. Herein lies the conundrum.

Making more goods in America can help to give domestic manufacturers better control of the supply chain. This is especially true as it relates to the procurement and management of raw materials needed for fabricated products. Increasing American manufacturing would help to stabilize the supply of critically needed goods and keep them under the control of the U.S. and limit the impact of global supply chain disruptions

What Does It Mean to Global Supply Chains That the U.S. Dollar is Strongly Valued?

Today, the U.S. dollar is in a strong value position, relative to the euro and yen, the strongest in 20 years. As interest rates have risen, so has the rate of returns for investors. Investors follow the money, and this causes the price of U.S. dollars to be bidden up in value. Having a strong dollar not only makes imported goods cheaper, it puts domestic workers in competition with lower wage overseas workers.

In the wake of COVID, countries around the world have suffered. When compared with conditions in other countries, the United States is faring better and is buying more of the world’s goods. Investors across the world have moved their money into the United States as a safeguard during times of economic and geopolitical uncertainty. This enables them to benefit from rising American interest rates.

In a global economy, currency rates are relative and impact economic conditions in countries around the world, not in just one nation. Foreign companies earn money in currencies that are valued lower than the dollar a year ago. Many countries now are holding significant debt that is denominated in U.S. dollars that has become more expensive. This level of debt impacts fragile economies and causes issues with debt repayment.

Here is one example. Sri Lanka lacks the financial reserves to pay for the increasing cost of imported goods and has banned hundreds of products including dairy products, refrigerators, and cars. This impacts consumers, the food supply, and even the most resilient supply chains.

Goods commonly bought across the world, including oil and nickel are priced in dollars. These goods are becoming more expensive, necessitating that countries must pay more money to convert their currency into dollars to make these purchases. This is especially true for India and China.

An overvalued dollar is problematic as it continues to drive up imports. Huge amounts of private foreign capital have been flooding American financial markets since 2014, increasing its value by nearly 21 percent. This continually makes American exported goods more expensive and reduces the price of imported goods.

Fluctuating Currency Exchange

The fluctuating value of currencies against a strong U.S. dollar can be beneficial or detrimental depending on whether a company imports or exports goods. For example, The United States is the largest producer of corn and Mexico is its largest importer of corn from the U.S.

As the importer, a Mexican company is more exposed to risks associated with currency exchange rates between the U.S. dollar and the Mexican peso. As the dollar strengthens and corn becomes more expensive, Mexican importers are negatively affected.

Why is the U.S. Dollar Strong?

There are two reasons why the U.S. dollar is strengthening. Firstly, the Federal Reserve has instituted an aggressive strategy to combat rising inflation. It has increased interest rates from near zero at the beginning of 2022 to close to 4% as of November, according to the Federal Open Market Committee. Second, as interest rates have risen, foreign companies have begun to convert their money into U.S. dollars, causing its value to increase. The United States Dollar is the global reserve currency and is often used as a haven when foreign currencies are considered unstable.

For U.S. businesses, the rising dollar can mean that products are getting more expensive to foreign buyers. This can translate into loss of sales for American manufacturers, and subsequently to goods transported across supply chains. This also means that the revenue generated from the sale of American-made products sold overseas loses value when converted from local currencies to USD.

U.S. Dollar Effect on Logistics Service Providers

As the U.S. dollar continues to increase in strength compared to other currencies around the world, American-based logistics companies are facing an uphill battle. Imports of goods into the U.S. have increased while U.S. exportation activity has weakened. This has resulted in higher volumes of air and sea freight coming into the U.S. which has heightened the need for U.S. transportation and warehousing of imported products.

The increases in imported products flooding American ports, warehouses and distribution centers are causing strain to supply chains. Already faced with bottlenecks, experts believe that demand for transloading at ports will exacerbate congestion. This will make it more difficult to move products through U.S. seaports.

Intermodal rail freight transportation will also be impacted, affecting the shipment of goods throughout the country. In addition, companies that specialize in ecommerce fulfillment services will be placed under more pressure to provide fast and accurate delivery of goods. Without a sizable workforce or advanced technology integration, American supply chains may struggle as the value of the dollar increases.

A strong dollar places pressure on prices and extends beyond the direct exportation of goods from America. The prices of commodities such as oil are quoted in dollars, so a stronger dollar means a higher price for oil domestically and abroad. This affects freight and distribution companies that need crude oil and oil by-products to transport and deliver goods.

A strong American dollar also influences input costs such as labor. By stifling profits earned abroad and domestically, manufacturers, logistics and supply chain companies may be forced to halt wage increases or terminate employees. This can affect American business by negatively impacting customer expectations for fast and order fulfillment and delivery.

How U.S. Exportation is Impacted by the Strength of the U.S. Dollar

Effects from the global pandemic drove many U.S. companies to search for domestic alternatives for their production, warehousing, and shipping needs. New warehousing facilities were constructed, and supply chain technologies implemented to help revive American reliance on its own capabilities. The surge in the dollar is threatening this resurgence.

Many U.S. companies are still recovering from supply chain issues and material shortages stemming from the global pandemic. A strong U.S. dollar creates an economic environment that makes foreign goods and services less expensive compared to American products. In these days of high inflation all around the world, this does not bode well for American made goods.

While American consumers can benefit from lowered prices of imported goods, American exports can be negatively impacted. As the dollar appreciates, the cost of foreign goods goes down and the cost of American-made goods increases. This makes the U.S. less competitive in the global trade. Domestic companies must cut their costs to compete in the U.S. and abroad. Consequently, foreign exporters of goods to the U.S. can slash prices and increase returns in their own currencies.

Economists and supply chain management experts believe that the strengthening U.S. dollar will have a debilitating effect on American manufacturing and subsequently U.S. export supply chains. At a time when U.S. companies are adding production capabilities, foreign companies are gaining price advantages on exports to the U.S. The competition between Baltimore-based Marlin Steel Wire Products LLC and its European counterparts is a prime example.

Marlin currently produces equipment for semiconductor manufacturing plants being built in the U.S. Prior to pivoting production from medical equipment to semiconductor parts, the company added 50% more floor space. It also invested in advanced robotic technology and acquired another manufacturer to boost its production capabilities. However due to the soaring dollar, the company’s European rivals in semiconductor parts manufacturing can offer their products at a lower price to their customers located in the U.S.

U.S. Imports Are Affected by the Strength of the U.S. Dollar

The rising dollar makes U.S. imports cheaper, giving an advantage to American supply chains. Many U.S.-based companies are finding better prices on goods imported from other countries due to the dollar’s enhanced purchasing power. Those that import raw materials from foreign countries can enjoy lower costs of production and subsequently higher profit margins

In effect, the higher dollar makes foreign goods cheaper for American companies by effectively pricing weaker foreign currencies out of the market. This reduces global demand, essentially depressing foreign economic growth.

When imports of goods into a country increase, funds flow away from the country and into another. This is what is currently happening in the U.S. Although the rising dollar is helping to keep inflation in check, labor shortages within the logistics and supply chain industry are limiting the ability of companies to absorb increased demand.

The reliance upon foreign goods has caused the U.S. economy to be dependent on disrupted and vulnerable supply chains. As imports and the American trade deficit continue to rise, the threat to the U.S. economy continues to grow. Cheap imports put domestic supply chain workers in competition with low-wage overseas laborers. As a result, U.S. jobs in manufacturing and warehousing have suffered as multinational corporations have moved business to countries such as Mexico and China.

Conclusion

The strong dollar has impacted supply chains around the globe. This has caused challenges for most countries, especially those in emerging market economies. In the past, countries such as China who export a high volume of goods to the U.S. reveled at a strong dollar, as it offered the country a chance to weaken the value of its currency to gain trade advantage. However, as U.S. domestic production and transportation capabilities have been infused with investment, companies are bracing as the rising U.S. dollar transforms supply chains.

Capital markets, wealth management professionals and others in the corporate finance community closely watch the value of currency and its impact on both value chains and global supply chains. From our domestic food supply to the impact on production cycles of highly sought-after consumer products, currency rates are critical in helping to maintain the essential balance of supply and demand.

Currency value impacts both the cost of raw materials and finished products. The value of the U.S. dollar also impacts foreign investment in real estate, such as in industrial real estate favorites warehouses, distribution, and fulfillment centers.

What this means to supply chain management and business logistics companies:

Increase in North American imports with weakened export activity
Growth of intermodal rail in North America
Increased pressure on already burdened rail system
High demand for transloading at ports
European companies are better positioned to sell products into North America, resulting in increased
- Air and sea freight on Europe-North America lanes
- Cross border activity from Mexico and Canada
- Increased domestic North America transportation and warehousing for imported goods

While social media and supply chain leaders are concerned about inflation, others are closely considering the impact of the overvalued U.S. dollar on the overall American economy. The dollar value influences the growth and resilience of global supply chains, capital markets and economies worldwide.