The value of the US dollar against other major currencies has reached its highest level since the early 2000s. Even as fears of a recession mount and the economy shows signs of slowing down, the dollar continues to rise.
A strong dollar can make products imported into America cheaper and travel abroad cheaper for American travelers. Large companies operating in multiple countries, such as: Johnson & Johnsonhave recently complained that the rising dollar could hurt their profits as foreign sales lose value when converted back into dollars and they become less competitive with local companies as their products become more expensive abroad.
Biden’s economic policymakers and officials have claimed that the strong dollar could even help lower inflation in the United States, which has reached its fastest pace in four decades. Economists say the impact would be relatively small, but still positive, as many households struggle to pay for essentials like food, rent and gas.
A strong dollar also has broad implications for the global economy and devalues currencies in other countries. The value of the dollar is also of great importance to emerging economies, as these countries are at greater risk of being unable to pay their debts.
Here are answers to four key questions you may have about dollar strength.
1) Why is the dollar extremely strong right now?
The basic explanation for the dollar’s strength comes down to this: While it may be weird in the US economy right now, a combination of factors has made the dollar a better bet for investors than most other currencies.
The dollar has risen largely because the Federal Reserve is on track to raise interest rates faster than other major countries, said Kenneth Rogoff, an economics professor at Harvard University and former chief economist at the International Monetary Fund.
The central bank began raising interest rates in March after holding them at near zero for much of the pandemic, then pushed through another major rate hike on Wednesday, interest rate hike by three quarters of a percentage point. Higher interest rates make the dollar more attractive to investors because it means they would earn a greater return.
The Russian invasion of Ukraine has also put pressure on European economies and rocketed natural gas prices, making the US economy look healthier by comparison, Rogoff said.
“Everyone is talking about a recession, but the US economy is doing better than many other economies,” he said.
The dollar acts as a ‘safe haven’, said Vassili Serebriakov, a currency strategist at UBS, an investment bank. as the growth prospects for the global economy deteriorateInvestors have become more concerned and have flocked to the dollar, putting their money into safer assets like U.S. Treasuries, Serebriakov said. That, in turn, has boosted the value of the currency.
“More recently, it has had less to do with the US and more to do with a global downturn,” Serebriakov said.
2) What does this mean for Americans?
Among other things, a stronger dollar helps curb inflation by making imports cheaper, said Marc Chandler, chief market strategist at Bannockburn Global Forex, a trading firm. Foreign sellers are more likely to lower prices when the dollar becomes more valuable, which translates into lower prices for imported products Americans buy.
But with prices as high as they are now, that may not provide much relief to consumers. Chandler said the strength of the dollar could reduce 0.2 or 0.3 percent of headline inflation, a small amount compared to the 9.1 percent rise in consumer prices a year ago.
“Wages are not keeping up with inflation,” Chandler said. “And does a stronger dollar really matter that much? Probably not.”
There are other bright spots. It is well known that a stronger dollar is good for American travelers, who can get more bang for their buck in other countries. Americans already find it easier to finance European holidays and make purchases luxury goods and fine wines in other countries. Some US buyers are even house hunting in countries like Franceas the weaker euro means it is cheaper for them to buy property in Europe compared to a year ago.
While a strong dollar is especially beneficial to US consumers, it could have more negative impacts on companies doing business in other countries because local dollar revenues and profits are worth less and their products become more expensive abroad, driving demand. decreases.
Exports are also becoming more expensive abroad, which could hurt U.S. companies that export goods or services. Workers in sectors such as agriculture or manufacturing may also be affected if their jobs depend on exports.
In general, however, many Americans don’t notice the effects of a stronger dollar in their daily lives, said David Wessel, the director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. Compared to many European countries, the United States is self-sufficient, producing much of what Americans consume, Wessel said.
Wessel noted that a stronger dollar could make real estate in the United States more expensive for foreign buyers, making those investments less attractive to them. That could help ease some price pressure in the housing market, a positive outcome for Americans trying to buy homes, he said. But in general, people in other countries are more likely to feel the impact of a stronger dollar than Americans.
“When you go to some other countries, people are fixated on the exchange rate,” Wessel said. “While I think most Americans have no idea if the dollar is strong or weak.”
3) What does this mean for other countries?
For other countries, a strong dollar pushes up import prices, which could cause inflation in those regions. The impact could also be cruel to emerging economies.
When US interest rates are low, global investors tend to invest more in emerging markets, or the economies of countries transitioning to developed economies. But when rates in the United States start to rise and the dollar rises, money starts flowing out of those countries, Wessel said.
Some developing countries are better equipped to handle this, because they have more reserves or their exports are priced in dollars and have increased in value, but other countries may struggle. For example, Sri Lanka’s economy is beginning to crumble as it faces a mountain of debt and not enough US dollars to pay for import of essential goods.
Countries that borrow heavily in dollars could suffer as it becomes more difficult to make repayments as the dollar rises and their currencies depreciate, said Mark Sobel, the US chairman of the Official Monetary and Financial Institutions Forum and a former top Treasury Department official. .
“That means the amount of dollars they need to repay is going up,” Sobel said.
4) Where does the dollar go from here?
Currency markets are: extremely difficult to predict, so it’s hard to say whether the dollar will continue to rise or fall in the coming months. Harvard economics professor Rogoff said the dollar could fall if the war in Ukraine ended “miraculously”, easing pressure on European economies and causing their currencies to rise.
The dollar could also fall if the US enters a recession and the Fed has to cut interest rates to stimulate the economy, which some analysts predict this could happen next year. An economic downturn in the United States could also make investment in US assets and businesses look less attractive, causing the dollar to fall, Rogoff said.
On the other hand, if inflation remains stubbornly high and the Fed has to keep raising interest rates more than expected, the dollar could keep rising. It could also rise if the European Central Bank, which raised interest rates for the first time in more than ten years last week should kick back and cut rates, Rogoff said.
“It’s a very uncertain environment and the exchange rate will probably be difficult to predict,” Rogoff said.