The strengthening of the euro against the US dollar is already negatively affecting Lithuania‘s exports.
The higher euro exchange to the US dollar negatively affects Lithuania‘s exports as Lithuanian goods become more expensive and less competitive in foreign markets. Although Lithuania‘s exports to the US account for only about 4% of total Lithuania’s exports, US dollars are also the currency used to sell Lithuanian products to non-EU foreign markets which last year accounted for nearly 40% of Lithuania’s total exports.
On the other hand, the higher purchasing power of the euro is good news for imports as foreign products become cheaper, it is particularly beneficial to industries importing raw materials.
However, exchange rate fluctuations reduce the confidence of foreign traders in exported goods as it becomes less clear what price point the goods will sell at. Increased insecurity may slow down the investment decisions and demand for exports of Lithuanian products.
In 2016 alone the rate of exchange between the two currencies has moved 4.5 percentage points. The US dollar continues to weaken against the euro – trading at around $1.14 to the euro yesterday.
Although the US economy is growing, the United States Federal Reserve is in no hurry to raise interest rates. Meanwhile, with an expasionist ECB monetary policy, interest rates are unlikely to rise.
With increasing prices and interest rates unchanged, Lithuanian analysts say that US investors earn lower returns – with investment yields consumed by higher inflation, therefore, the US dollar falls against other currencies.
The ECB’s monetary policy strategy is currently unclear: although the central bank sharply increased its monetary stimulus, the bank’s president Mario Draghi said that eurozone interest rates will not fall further – putting upward pressure on the euro exchange rate.
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