The slow-growing U.S. economy could use a tailwind, and it’s getting one in the form of a weaker dollar.
The U.S. currency has been in a steady decline since January after reaching a 15-year high. The WSJ Dollar Index, which measures the dollar against the currencies of major trading partners, is down about 8% since the beginning of the year, including a more than 2% drop over the past month. Its decline has been especially pronounced against the euro, 11%, and the Mexican peso, 14%.
Part of the weakness owes to improved stability in the rest of the world, particularly Europe. After years of repeated fiscal and political crises, Europe’s growth so far in 2017 has slightly outpaced the U.S. That’s given European Central Bank officials confidence to contemplate pulling back on their stimulus measures, which is giving the euro a boost.
Meanwhile, President Donald Trump hasn’t pursued action against Mexican exports as aggressively as some feared when he was elected, which is giving a bump to the currency of the U.S.’s southern neighbor.
A weak currency has its downsides. It weakens the purchasing power of dollars globally, making it more expensive to travel overseas and pushing up the price of imported goods. If it happens in a hurry, it can destabilize financial markets and discourage investment at home.
But the near-term upsides to a weak dollar could outweigh those risks. It makes U.S. exports cheaper overseas, and thus helps to drive production at home. In June, exports were up 7% from a year earlier. That’s a sharp reversal compared with the 9% drop from 2014 to 2016, when the dollar was climbing rapidly.
The change could be especially helpful to manufacturers. U.S. manufacturing output was up 1.4% in June from a year earlier, after registering declines in 2015 and 2016. Some of that is due to a recovery in the energy sector, but it isn’t all energy. Durable goods output was up 1.3% in June.
The weak dollar “has been a nice boost to overall economic growth when there’s still a lot of uncertainties for the economy,” said Chad Moutray, chief economist for the National Association of Manufacturers. He cites among them the difficulty some companies face finding staff, impatience to see a tax overhaul and infrastructure legislation from Washington and geopolitical concerns, such as worries about North Korea. “People are aware of all those things, but our members are still upbeat.”
Export Uplift / U.S. exports have been rising as the global economy improves. Change from a year earlier:Source: Census Bureau
A weaker currency also increases the value of profits that multinationals earn overseas in other currencies—such as euros, pesos or yen—boosting the bottom line for investors when those foreign currencies are converted back into dollars. Moreover, at a time when Federal Reserve officials find domestic inflation too low, it puts upward pressure on consumer prices.
“I like a dollar that’s not too strong,” Mr. Trump said in an interview last month with The Wall Street Journal. “Lots of bad things happen with a strong dollar.”
On earnings calls this quarter, companies from the railroad CSX Corp. to Coca-Cola Co. have been citing the benefits of a sliding dollar to their bottom line.
Companies benefit in different ways. For CSX, increased exports mean busier trains; while at Coca Cola, foreign sales are now worth more when converted back to dollars. So far, the first two quarters of 2017 have been the strongest for profit growth at S&P 500 companies since 2011, with 15% growth from a year earlier in the first quarter and about 12% in the second, according to data from Thomson Reuters, with 455 of the 500 companies having reported.
Slow progress on taxes and infrastructure in Congress has done little to damp investor enthusiasm for stocks, in part because a corporate boom is kicking in. That’s helped to push the Dow Jones Industrial Average up more than 10% so far this year. The improved profitability has been broadly based; the only major industry with falling profits, utilites, has relatively little international exposure.
The dollar decline also serves the needs of the Federal Reserve.
Fed officials have grown somewhat anxious about an unexpected slowdown in the inflation rate this year. The Fed targets an inflation rate of 2%, and over the last five years has consistently undershot that. An uptick in prices could ease those concerns, something a weak dollar helps to produce by pushing up import prices. They were up 1.5% in June compared with a year earlier, reversing declines in 2015 and 2016 as the dollar rose. Some of that, again, is due to a rebound in energy prices. But even excluding fuel, import prices were up 1% in June from a year earlier, after steady declines in 2015 and 2016.
“A little more inflation would be viewed positively and allow the Fed to continue on its course, without the market believing it’s a mistake,” said Matt Luzzetti, a senior economist with Deutsche Bank .
Mr. Luzzetti and his colleagues at Deutsche Bank estimate a weak dollar will increase the inflation rate by about 0.2 percentage point by next summer. With inflation only a little bit below the Fed’s goals, that could be all that’s needed to hit the target.
“It’s been very orderly. Nobody would characterize the dollar as falling out of bed, which could be destabilizing,” said Jay Bryson, global economist for Wells Fargo . “In a slow-growth environment we’ll take whatever we can get.”
Corrections & Amplifications
From the beginning of the year through Friday, the dollar has declined 11% against the euro and 14% against the Mexican peso. An earlier version of this article incorrectly stated incorrectly stated the dollar was down 15% and 28%, respectively. Also, a graphic with the article showed the change in the strength of the dollar against the WSJ Dollar Index, euro and peso. The graphic was labeled incorrectly as the change in those instruments’ value against the dollar. (Aug. 16, 2017)
Write to Josh Zumbrun at Josh.Zumbrun@wsj.com