Strong U.S. Dollar Could Weaken U.S. Auto Industry Exports

OTTAWA – The rising value of the U.S. dollar in international exchange markets is inflating the value of exported U.S.-made vehicles while reducing the cost of competing imports and parts sourced overseas. 

With war and inflation making the U.S. dollar an attractive option to currency traders, the greenback has been appreciating, including against the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc – making up the U.S. dollar index (USDX). In September 2021, this index rating was 92.1. On Aug. 30, it was 108.4. 

Matt Blunt, president of the American Automotive Policy Council (AAPC), tells Wards: “Currency exchange rates do have a significant impact on trade. I am sure each automaker will respond to the strength of the U.S. dollar in their own unique way.”

Blunt (pictured, below left), a former Missouri governor, hopes governments will not interfere in markets: “AAPC is a firm believer in allowing the currency markets to freely adjust based on market forces and avoid, as much as possible, undue interference by one or more countries to gain an unfair trade advantage.” 

Matt Blunt.jpgIndeed, as regards the U.S. federal government, he says, “The only thing we ask of our government is to make sure that currency manipulation by our trading partners does not occur.” 

The U.S. dollar has been steadily appreciating against the Canadian dollar since October 2021, when $1 bought C$1.23. On Aug. 30, it bought C$1.29. 

As a result, the strengthening greenback could lower the price of Canadian vehicle exports in the U.S., which – for passenger vehicles (other than buses) – have been falling. The value of Canadian vehicle exports to the U.S. was $26.5 billion in 2021, down from $29.7 billion in 2020, according to Canadian government data.

David Adams, Global Automakers of Canada CEO and president, says should the U.S. dollar remain strong in the longer term, “it could be a significant issue.” In the shorter term, most auto companies’ currency hedge contracts will mitigate exchange system shifts, but over the long term, a weaker Canadian dollar “will help Canadian businesses that are selling into the U.S. market,” he says.

Also, the favorable exchange rate should help in “luring investment into Canada” for new tech, such as battery components manufacturing, Adams says. “If I have some automotive makers looking at putting in new capacity to make (electric vehicles), that currency exchange rate would be one more factor that would enter into the equation.” 

As for parts makers, a key strength of the Canadian automotive industry, exchange rates could make sales more attractive to North American assemblers. However, Adams stresses that long-term contracts are common, and parts manufacturers often provide modular components, which include U.S.-made inputs. This might limit exchange-rate gains enjoyed by the Canadian parts sector, which sold parts (excluding body, chassis and engines) to the U.S. worth $9.7 billion in 2021 and $8 billion in 2020. 

Vic Fedeli (pictured, below left), Ontario minister of economic development and job creation, tells Wards the “favorable exchange rate between Canada and the United States” will help Ontario “be a leading destination for automotive manufacturers to invest and grow their businesses.” The “competitive exchange rates,” he says, will help underpin growth in the province as “home to a growing electric-vehicle assembly and battery supply chain.” 

Vic Fedeli_0.jpgThe U.S. dollar has been rising in value against the euro at a faster rate still. In August 2021, €1 was worth $1.18. One year later, the two currencies are trading at parity. 

David Bailey, professor of business economics at the U.K.’s Birmingham Business School and an automotive expert, says the strengthening U.S. dollar also will help exporters of vehicles based in Britain and the European Union increase sales in the U.S.: “The premium side should be doing very well,” he says, noting how the U.S. remains the most valuable market for Jaguar Land Rover, which makes vehicles in the U.K. and EU. “German premium players – it will help them, too,” he says. 

“It will hamper exports from the U.S.A.,” Bailey adds, predicting Tesla will refocus its supply chain to Europe and the U.K. from U.S. manufacturing onto China plants. China-made Model 3s and Ys already are a significant element of the company’s EU sales. “It will encourage more production from China,” he says. 

Silver linings for U.S. automakers? Bailey says given the importance of U.S.-made pickup sales to U.S. consumers, profit declines would be cushioned unless interest rate increases “tip the economy into recession.” Also, U.S. manufacturers have the option of shifting production to Mexico to reduce costs and reducing their exposure to dollar exchange rate rises in the export market. That said, the Mexican peso has held its value against the U.S. dollar and gained against the euro and British pound in the past year. 

A U.K.-based automotive industry specialist requesting anonymity notes the currency shift impact would not be uniform, with some super-premium exporters such as Bentley, Aston Martin and McLaren being so expensive that their consumers are too rich to care about exchange rates. As for the mass market, the ability of the U.K. and other exporting countries to respond is currently restricted by the continued semiconductor shortage, the specialist says.

Also, the June 2021 closure of the Honda plant in Swindon, England, has reduced U.K. exports to the U.S.; America was a key market for its vehicles. Figures from the U.K.’s Society of Motor Manufacturers and Traders show the share of U.K. auto exports to the U.S. in first-half 2022 fell to 10.8% from 16.6% in 2021, partly because of the closure. 

Tesla Model Y Shanghai China screenshot.png

Tesla could boost Chinese production of Model Y if strong dollar curtails U.S. exports.

Read More: Strong U.S. Dollar Could Weaken U.S. Auto Industry Exports

2022-09-14 04:12:30

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