What does a strong dollar mean for Americans?

The value of the US dollar reaches its all-time high against other major currencies since the early 2000s, Even as recession fears mount and the economy shows signs of slowing, the dollar continues to bounce.

The dollar, which has been on an upward trend for almost a year, is at par with the euro this month. for the first time in two decades, japanese people The yen also declined sharply against the dollar.

A stronger dollar could make imported products into the US cheaper and travel abroad less expensive for American travelers. Large companies operating in many countries, such as johnson and johnsonThe U.S. has recently complained that rising dollars can hurt their profits because foreign sales lose value when converted back to dollars and they become less competitive with local companies as their products become more expensive overseas. Huh.

Economic policy makers and Biden administration officials have Claims that a stronger dollar can also help reduce inflation in the United States, which is running on its Fastest pace in four decades, Economists say the impact will be relatively small, but still positive, noting that many households are struggling to afford essentials such as food, rent and gas.

A strong dollar has wide-ranging implications for the global economy, devaluing currencies in other countries. The value of the dollar also matters a lot to emerging economies, as it puts those countries at greater risk of defaulting on their loans.

Here are the answers to four of your key questions about the strength of the dollar.

1) Why is the dollar so strong right now?

The basic explanation for the strong dollar boils down to this: Although things may be awkward in the US economy right now, a combination of factors make the dollar a better bet for investors than other currencies.

Kenneth Rogoff, professor of economics at Harvard University and former chief economist of the International Monetary Fund, said the dollar is rising in large part because the Federal Reserve is on track to raise interest rates faster than other major countries.

The central bank began raising interest rates in March after keeping it near zero for much of the pandemic, and on Wednesday made another big rate hike, Rates hiked by three-quarters of a percent, Higher interest rates make the dollar more attractive to investors, as it means they will get bigger returns.

Russia’s invasion of Ukraine has also strained European economies Natural gas prices are skyrocketingTo make the US economy comparatively healthy, Rogoff said.

“everyone is talking a recessionBut the US economy is doing better than many other economies,” he said.

Dollar is acting as a “safe haven”, said Vasily Serebryakov, a forex strategist at UBS, an investment bank. In form of Growth outlook for world economy deterioratesInvestors have become more concerned and attracted to the dollar, Serebryakov said, putting their money in safer assets like US Treasury bonds. This in turn has increased the value of the currency.

“Recently, it has less to do with the US and more to do with the global recession,” Serebryakov said.

2) What does this mean for Americans?

Among other things, a stronger dollar helps curb inflation by making imports cheaper, said Mark Chandler, chief market strategist at Bannockburn Global Forex, a trading firm. When the dollar becomes more valuable, foreign sellers are inclined to lower prices, which translates into lower prices for imported products that Americans buy.

But with the prices now running high, consumers may not get much relief. Chandler said the dollar’s strength could reduce overall inflation by 0.2 or 0.3 percent, which is a small amount compared to Consumer prices up 9.1 percent from a year ago,

“Wages are not keeping pace with inflation,” Chandler said. “And does a strong dollar really do all that much for it? Probably not.”

There are other bright spots. It is commonly known that a stronger dollar is good for American travelers, who can get more for their money in other countries. Americans are already finding it easier to fund European vacations and shopping Luxury goods and fine wines in other countries. Some US Buyers Are Even Househunting in countries like FranceBecause a weaker euro means it is cheaper for them to buy real estate in Europe than it was a year ago.

Although a stronger dollar is favorable to most US consumers, it can have a more negative impact on companies that operate business in other countries because revenue and profits earned in local currencies are less in dollar terms and their products overseas more. become expensive, which reduces demand.

Exports abroad also tend to be more expensive, which can hurt U.S. companies that export goods or services. Workers in industries such as agriculture or manufacturing may also be affected if their jobs depend on exports.

Overall, however, many Americans may not notice the effects of a stronger dollar in their daily lives, said David Wessel, director of the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy. Wessel said that compared to many European countries, the United States is more self-sufficient, producing much of the American consumption.

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 relieve some of the price pressures 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 than Americans to feel the impact of a stronger dollar.

“If you go to some other countries, people are fixed on the exchange rate,” Wessel said. “While my guess is, most Americans have no idea whether the dollar is strong or weak.”

3) What does this mean for other countries?

For other countries, a stronger dollar drives up import prices, which can create inflation in those regions. The impact could be brutal for emerging economies as well.

When US interest rates are low, global investors tend to invest more in emerging markets or the economies of countries that are transitioning to developed economies. But when rates start going up in the United States and the dollar climbs, money starts pouring out of those countries, Wessel said.

some developing countries are better equipped to handle, because they have more reserves or their exports are priced in dollars and increasing in value, but other countries may struggle. For example, Sri Lanka’s economy is beginning to crumble as it deals with mountain of debt And don’t have enough US dollars to pay import of essential goods,

Mark Sobel, US president of the Official Monetary and Financial Institutions Forum and a former Treasury Department official, said countries that heavily borrow in the dollar could suffer as repayments become harder to make as the dollar rises and their currencies depreciate. Is.

“That means the number of dollars they need to pay will increase,” Sobel said.

4) Where does the dollar go from here?

money markets are very difficult to predict, so it is difficult 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 “miraculously” stops, relieving pressure on European economies and propelling their currencies.

If the US enters a recession, the dollar may also fall and the Fed has to cut interest rates to stimulate the economy, which Analysts forecast could be next year, Rogoff said an economic downturn in the United States could also make investing in American assets and companies less attractive, which could result in the dollar falling.

On the other hand, if inflation remains very high and the Fed continues to raise interest rates higher than expected, the dollar may continue to rise. It could also climb if the European Central Bank, which Interest rates raised for the first time in more than a decade Last week, it backpedaled and aims to cut rates, Rogoff said.

“It’s a very uncertain environment, and it’s probably going to be hard to predict the exchange rate,” Rogoff said.

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