Dollar’s Strength Has Little Effect On Small Retailers, Big Effect on Wholesalers

There’s an assumption that the strength (or weakness) of the U.S. dollar has direct impact on the vitality of small U.S. retailers, especially now that the global economy has become so interconnected. But a new study finds that the dollar’s strength compared with foreign currencies has little effect on the closure rate of small retailers, but a much larger effect on small wholesalers.

The study, released this morning by the Small Business Administration’s Office of Advocacy, looks at business closures across 50 various industries between 1990 and 2005. The closure data was evaluated in relation to several economic factors including the dollar’s real exchange rate, U.S. gross domestic product, and growth of firms with more than 500 employees.

Investigators found that small retailer closures were not statistically linked to the real exchange rate but rather more affected by the rise of large “big-box” stores – something they want to explore further in future studies. The one exception was small auto dealers, which were affected by exchange rate fluctuations likely because their success is so closely tied to domestic automakers. Small retailers that sell a mix of domestic and imported goods tend to benefit when the dollar appreciates, the author notes.

Small wholesalers, on the other hand, saw a much bigger effect from exchange rate fluctuations: Among wholesale firms with more than 10 employees analyzed, a 10% real appreciation in the dollar led to a 20% increase in firm closure. The reason, the authors note, is likely that wholesalers are very closely tied to U.S. manufacturers whose success and failure is closely linked to the exchange rate. Wholesalers find it hard to switch suppliers to take advantage of falling import prices when the dollar rises. The hardships experienced by domestic manufacturers when the dollar goes up are then “passed downstream” to wholesalers, they add.

So what does this all mean?

“For many people, the idea of currency exchange rates has no relevance other than how far their dollars will go while on vacation,” says Shawne McGibbon, Acting Chief Counsel for Advocacy, in a news release. “But it is of vital importance to the owners and employees of small wholesalers. Policy makers should take these concerns into account when making decisions affecting the relative strength and weakness of the dollar,” she added.

Does your business depend on the dollar’s strength or weakness?

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