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Strong US dollar could affect Trump’s economic plans

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NEW YORK The strong US dollar, boosted further by the Federal Reserve's decision to raise interest rates, could pose challenges to President-elect Donald Trump's economic agenda.

The greenback shot to fresh multi-year highs against the euro and other currencies on Thursday, following the Federal Reserve's move on Wednesday to increase the benchmark lending rate and its signal about additional rate increases next year.

Many analysts expect the dollar to continue to rise, after gaining 5 per cent against a basket of six currencies since Mr Trump's election.

Investors flock to markets that have higher interest rates seeking better returns, which creates more demand for dollars. But while the US remains a strongly consumer-oriented economy, data shows exports are becoming more important to the economy.

Exports as a percentage of US gross domestic product rose to 12.6 per cent last year from 9.1 per cent in 2002, according to the World Bank.

"The US has been exporting more and more," said economist Joe Naroff. "There is greater sensitivity of the economy to the strong dollar now than five or 10 years ago."

A wide swathe of the US economy now depends on exports - including farmers in the Midwest, steel companies in Ohio and chemical companies in the Gulf Coast.

All of these sectors were already suffering from the strong dollar, according to Fed's "beige book" report on economic conditions released last month.

However, it also noted that manufacturers can import raw materials at lower prices.

Mr Trump has vowed an "America First" approach to economic policy, pressuring companies to build and keep factories in the US.

But a strong dollar will add to the price of US exports, making it harder for them to compete in other markets.

A strong dollar hits multinationals not only by making their goods more costly overseas but by forcing them to convert overseas earnings into dollars at a disadvantageous rate.

Some of these negative impacts will be offset by other Trump pledges, such as a cut in corporate taxes.

But "tax reform tends to take a long time", said Mr Aidan Garrib, global macro strategist at Pavilion Financial.

He predicted the strong dollar would hit US companies even more than in 2014, because the greenback is even higher now. - AFP

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