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In January 2015, several large multinational corporations announced lower than expected earnings for the fourth quarter...

In January 2015, several large multinational corporations announced lower than expected earnings for the fourth quarter of 2014. Many blamed the monotonous profits on a strong dollar. How does this work? When the dollar gains value against foreign currencies, why does it hurt U.S. exports? How could this affect the demand for dollars and ultimately affect the exchange rate?

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When dollar gains against foreign currencies, a dollar is said to appreciate. When dollar appreciates, more foreign currencies are required to buy one dollar. So, US exports become less competitive since foreign importers need to pay more in order to buy the dollar required to pay for US exports. As a result, US export demand falls and US export sector is hurt.

For multinational firms, lower exports mean lower profit.

Lower US export demand will decrease the demand for the dollar, leading to eventually the lower value of the dollar, resulting in the lower exchange rate.

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