Is the dollar’s strength vs. the euro good or bad for the US?

With the euro hovering somewhere between $1.05 and $1.09 recently, you might wonder if we should be happy or sad about this. As you might expect, there are several answers to this question, depending on who you are and what your timeframe is. In particular:

• You’re happy if you import stuff from Europe or want to go on a European vacation.
• You’re sad if you want to sell stuff to the Europeans or compete with them in the U.S. or international markets.

You’ll notice that the above translates roughly to: Consumers win and producers lose. This points to a longer-run issue: To stay competitive and retain market share, U.S. producers will need to shave their profit margin if they expect to keep profits positive in the face of an exchange rate-induced change in relative prices of 13 percent in favor of the euro in the first quarter of 2015. This is not a good thing for long-run growth or employment. Our recovery from the recession will continue, but not as fast as it otherwise might.

{mosads}Will the dollar’s strength against the euro last? The answer to this is necessarily more speculative. On the one hand, weakness in European economies, coupled with aggressive monetary expansion to combat renewed recession, will continue to weigh on their currency. However, let’s remember that the recent bout of euro weakness was triggered by worries about a Greek exit from the euro and possible domino effects in other euro countries. In the short run, the chaos a “Grexit” would cause would likely weaken the euro further.

But if that happens, I am going to buy euros. Why? Just because Greece leaves the euro (and possibly other weaker peripheral economies such Portugal, Ireland, etc.) doesn’t mean the core euro countries will abandon the currency. Germany and the “hard-line” core will likely stay the course and a eurozone consisting of only Germany and like-minded (in economic policy terms) neighbors is one whose currency is only likely to rise.

Does that mean the dollar’s return to reserve currency dominance will end? Not necessarily, but it is almost always a mistake to ignore the long run in favor of focusing only on the past three months.

Is there anything we can do about all of this? No, or at least not anything that has a chance of happening. Both the U.S. and Europe will do what they have always done: Set their economic policy according to their views of what is best for their own country (or countries). The exchange rate has never been the primary target of policy and likely never will be. But that doesn’t mean it doesn’t matter.

Kyle is an associate professor at the Charles H. Dyson School of Applied Economics and Management at Cornell University.