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Strong Dollar Is Playing Spoilsport in International Trade

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Dec. 4 2020, Updated 10:50 a.m. ET

Lower fuel prices topple imports

US import prices declined 1.8% in August as compared to the 0.9% decline in July 2015. The decline was more than the consensus estimate of 1.6%. A drop of 13.3% in fuel prices primarily led to the decline in import prices in August. US import prices have been on a declining spree except in May and June. Even the stronger dollar has not been able to provide a breather to the importers. Not only fuel import prices but also the non-fuel price index has dropped 0.4% in August. US imports account for 16.5% of the US GDP (gross domestic product) and a continued fall in import prices implies that the consumers are cautious in their spending.

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Weaker exports are hurting industrial stocks

Exports account for about 14% of the US GDP. A stronger dollar has deteriorated competitiveness of US companies in international trade. Over the past year, the dollar has appreciated by 14% against the major currencies. This has resulted in a decline of demand for goods and services produced in the US. Export prices have decreased 7% over the past 12 months and 1.4% in August. A continuous decline in exports reflects high competition in the foreign market, and the strong dollar is playing a spoilsport for the US industries.

The Industrial Select Sector SPDR Fund (XLI) is an ETF representing industrial stocks such as construction and engineering, electrical equipment, and commercial services and supplies. Over the past year, it has been down 5.43% as of September 10. Also, its top holdings, General Electric Company (GE), 3M Company (MMM), Honeywell International (HON), and Boeing Company (BA), are down 4.01%, 5.19%, 5.52%, and 7.29%, respectively, over the past month. These stocks carry a weight of 10.18%, 5.08%, 4.50%, and 4.83% in the ETF as of August 30.

Inflation is an important factor in regards to the effectiveness of monetary policy in the economy. In the next article we’ll look at recently released France inflation data.

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