What a Strong Dollar Means as Global Economic Worries Rise

The value of the US dollar is the strongest in a generation, devaluing currencies around the world and disrupting the outlook for the global economy as it upends everything from the cost of vacations abroad to the profitability of multinational companies.

The dollar lubricates the global economy. It’s a side of about 90% of all foreign exchange transactions, accounting for $6 trillion of activity each day before the pandemic, from tourists using their credit cards to businesses making large international investments.

As the world’s most important currency, the dollar often appreciates during turbulent times, in part because investors view it as relatively safe and stable. Its performance is often seen as a marker of global economic health: the dollar has appreciated in recent months as inflation has soared, interest rates have risen and growth prospects have deteriorated . “It’s a pretty tough mix,” said Kamakshya Trivedi, co-head of a market research group at Goldman Sachs.

The main way to gauge the strength of the dollar is to peg it to a basket of currencies from major trading partners like Japan and the Eurozone. By this measure, the dollar is at its highest level in 20 years, having gained more than 10% this year, a huge move for an index that typically moves tiny fractions every day.

Last week, the yen fell to its lowest level in 24 years against the dollar and the euro fell to parity, a one-to-one exchange rate, with the dollar for the first time since 2002. But choose to pretty much any currency — the Colombian peso or the Indian rupee, the Polish zloty or the South African rand — and it’s probably lost value against the dollar, especially in the last six months or so.

“It’s a very, very strong dollar,” said Mark Sobel, a former US Treasury official who is now the US chairman of the Official Monetary and Financial Institutions Forum, a think tank. Generally speaking, the dollar has only been stronger three times since the 1960s.

The factors rocking the global economy are part of the reason why the dollar has suddenly become so much stronger.

As central bankers around the world attempt to rein in inflation by raising interest rates, the Federal Reserve is moving faster and more aggressively than most. As a result, interest rates are now significantly higher in the United States than they are in many other major economies, attracting investors attracted by the higher yields of even relatively conservative investments such as government bonds. Treasure. As the money flowed in, the value of the dollar rose.

Bank of America analysts have estimated that more than half of the dollar’s rise this year could be explained by relatively aggressive Fed policy alone.

Analysts have cited its safe-haven status amid deteriorating economic conditions and stock market turbulence. They also said the dollar was rising because high energy prices were hitting the economies of importers, like most European countries, harder than the United States, which is less dependent on buying oil and gas. abroad.

“It’s a perfect setup for the dollar,” said Calvin Tse, market strategist at BNP Paribas. “Not only are recession fears growing, but the United States also appears to be better off than the rest of the world.”

While a stronger dollar can be a mixed blessing for individuals and businesses, such a sharp and rapid change in the value of the world’s most widely used currency can have its own destabilizing effect.

Americans traveling abroad this summer will find that their money goes further. “One of the only ways an American can reap the rewards of a strong dollar is to go on vacation,” said Max Gokhman, chief investment officer at AlphaTrAI, an asset management firm. “But even then the plane ticket is going to be a lot more expensive because of the rising oil prices.”

Companies based outside the United States saw their sales supported by the strength of the dollar. Burberry, the British luxury goods maker, said on Friday it would add more than $200 million to its revenue this year due to currency movements, helping to offset a drop in sales in China, where the economy is slowing down.

But U.S. companies with large international operations are hit hard when they convert their overseas sales back into dollars. The profits of Microsoft and Nike, for example, have recently eroded. Apple generates more than 60% of its sales outside the United States; it and other tech giants, which dominate many stock indexes, are expected to suffer from the strong dollar when they release their next batch of financial reports in the coming weeks.

Ben Laidler, global markets strategist at eToro, estimates the rising dollar will shave 5% off earnings growth for S&P 500 companies this year, or about $100 billion. That’s a big impact given that earnings for S&P 500 companies are expected to rise about 10% this year, according to FactSet.

Reflecting the drag, companies that generate most of their revenue in the United States have performed better than their rivals with more international exposure, according to indexes compiled by S&P Dow Jones Indices.

Many companies and governments abroad borrow in dollars, and the strength of the currency is a big issue. This is especially true for poorer countries attracted to dollar-denominated debt as an alternative to less developed local markets. As John B. Connally, a former Treasury Secretary, told his counterparts at a summit in the early 1970s: “The dollar is our currency, but it’s your problem.

Countries where dollar debt makes up a large portion of a country’s gross domestic product are likely to be hit the hardest. Paying interest to creditors in dollars has become particularly difficult for countries with rapidly depreciating currencies like Argentina and Turkey, especially since interest rates on any new debt will also rise. In some cases, including Sri Lanka, this has become seemingly impossible.

The dollar, however, has not beaten all currencies this year. Rising energy and food prices, which accelerated after Russia’s invasion of Ukraine, have been a boon for the currencies of countries like oil-rich Angola; Uruguay, a major food exporter; and Brazil, which sells a lot of energy and agricultural raw materials.

The Russian ruble, perhaps surprisingly, has been one of the best performing currencies against the dollar this year. High oil and gas prices, as well as capital controls imposed by Russia to keep money inside the country, have supported the official exchange rate. What little ruble-dollar exchange ordinary Russians are able to do is probably at a lower rate.

Can we stop the responsibility? Few analysts are betting his strength will wane soon, even after such a remarkable run. The US economy looks more fragile, but as Europe faces an energy crisis, Japan resists rising interest rates, China’s Covid-19 lockdown policies rumble its chains supply and other countries are reeling under the weight of high inflation, demand for dollars appears robust. Although we don’t know how long.

“For now, we still expect the dollar to trade on its toe,” Goldman Sachs’ Trivedi said. “There may be a little more to do, but most of the dollar’s move may well be behind us.”

Bank of America analysts noted that they were “struck by our conversations with investors focused on what could lead to a spike” in the value of the dollar, “as opposed to making it another 10% stronger.” .