The dollar is the strongest it has been this century. There are a lot of reasons behind that, and a lot of implications. It has a lot to do with the unsettled state of things throughout the world and the fluctuations in other countries’ currencies. This fall, the dollar reached parity with the euro for the first time in two decades and got as close to parity with the British pound as it’s ever been. Whether a strong dollar is a good or bad thing depends on who you are and what business you’re in.
The forces that have made the dollar strong are many of the same that caused or worsened inflation. Chief among them are Russia’s invasion of Ukraine, which has had a major impact on energy and food markets, and China’s zero-COVID policy, which has closed factories periodically and jolted the global supply chain. All the while, an economy roaring back after the pandemic keeps demand growing.
Steps to fight inflation, in the U.S. and elsewhere, have also had an impact on currencies. The Federal Reserve’s steps to raise interest rates throughout 2022 have strengthened the door, and more hikes will make it even stronger. When times get turbulent, investors and government central banks often store their reserves in dollars, which remain the world’s reserve currency.
“We keep close tabs on economic developments abroad,” Fed chair Jerome Powell said in November after another rate hike of 75 basis points. “We are in frequent contact with our foreign counterparts.”
Inflation is a global issue, and Powell knows the Fed’s move has consequences beyond the U.S. A strong dollar makes it harder for other countries to fight inflation, as their currencies are weaker by comparison. About half of all cross-border loans and international debt securities are in dollars, the IMF says, with those figures higher for emerging markets.
“Price stability in the US is a good thing for the global economy,” Powell said.
Winners & Losers
Within the U.S. and beyond, a strong dollar benefits some and hurts others. For the most part, they’re two sides of the same coin.
American travelers abroad are basically getting the world on sale, especially in Europe and the U.K., where the exchange rate has tipped in their favor by about 20%. That’s enough to keep Americans traveling internationally even as airfare and accommodation costs rise. On the flip side, international travel to the U.S. has become that much more expensive, leaving the domestic tourism industry hurting for business.
Imports have gotten cheaper, with items manufactured in the U.S. more expensive to international buyers, setting a course for record trade deficits. “For importers, it’s a positive story,” Nomura Securities senior foreign exchange strategist Jordan Rochester told NPR. “For anyone importing from the likes of China, importing raw metals and energy from abroad, that’s going to be positive for you — as long as it’s not priced in dollars, of course.”
Multinational corporations based in the U.S. but making many of their sales in other currencies are taking a haircut on the exchange rates. “We had a great quarter, but yet again, the dollar had an even stronger quarter,” Salesforce CEO Marc Benioff said on an earnings call with shareholders, noting that the strong dollar could cost Salesforce as much as $800 million in the fiscal year. Through three quarters, Microsoft was down nearly 30% for the year.
In addition to the loan and debt problems, emerging markets are also hurt by the fact that commodities prices are in dollars, making staple foods and energy more expensive for them.
Just how long this strong dollar will last is uncertain, but given the persistence of the causes, it seems certain to stick around through the first quarter of 2023. The Fed has not deviated from prognostications that it would need to raise interest rates through 2023 and into 2024 to get inflation down to around its 2% goal.
“We know we need to use our tools to get inflation down; the world won’t be better off if we don’t do that,” Powell said.
The war in Ukraine shows little sign of ending soon, affecting Europe’s economy and keeping the euro down. China shows every indication of continuing its zero-COVID policy. Japan’s central bank has resisted big rate hikes, keeping the yen weak. Emerging markets will continue to struggle against inflation. The pound has rebounded some since Liz Truss resigned after a 44-day premiership in which she fired chancellor Kwasi Kwarteng after proposed policies sent the sterling crashing to $1.035 briefly, but it remains significantly weaker against the dollar than a year ago.
By making imports cheap, the strong dollar should help tamp down inflation. In any time, the dollar remains the world’s reserve currency, about 40% of global transactions are settled in dollars.
“There simply aren’t many alternatives to the dollar that will fill these needs,” Schwab analysts wrote.
For better or worse, the dollar is going to keep on trucking.