NEW YORK – The dollar does not stand still.
The value of the US dollar has been in crisis for more than a year against everything from the British pound across the Atlantic to the South Korean won across the Pacific.
After climbing again on Friday, the dollar is close to its two-decade high against a key index that measures six major currencies, including the euro and the Japanese yen. Many professional investors don’t expect it to calm down anytime soon.
The rise of the dollar affects almost everyone, even those who will never leave the borders of the United States. Here’s a look at what is driving the US dollar up and what it can mean for investors and families:
What does it mean to say that the dollar is stronger?
Basically, a dollar can buy more of another currency than before.
Consider the Japanese yen. A year ago, $ 1 could have come in at just under 110 yen. Now he can buy 143. That’s about 30% more and one of the biggest moves the US dollar has made against another currency.
Foreign currency values are constantly shifting against each other as banks, businesses, and merchants buy and sell them in time zones around the world.
The US dollar index, which measures the dollar against the euro, yen and other major currencies, rose more than 14% this year. The gain looks even more impressive than other investments, most of which have had a sad year. US stocks fell more than 19%, bitcoin more than halved, and gold lost more than 7%.
Why is the dollar strengthening?
Because the US economy is doing better than others.
Although inflation is high, the US labor market has remained remarkably strong. And other areas of the economy, such as the service sector, have been resilient.
This helped offset concerns about a slowing real estate sector and other parts of the economy performing better when interest rates are low. This in turn causes traders to expect the Federal Reserve to deliver on its promise to continue to dramatically raise interest rates and hold them there for a while in hopes of bringing down the worst inflation in 40 years.
Those expectations helped a 10-year Treasury yield more than double to 3.44% from around 1.33% a year ago.
Who cares about bond yields?
Investors who want to earn more from their money. And those juicier American yields attract investors from all over the world.
Other central banks have been less aggressive than the Fed because their economies appear to be more fragile. The European Central Bank has just raised its benchmark rate by the highest amount ever, three quarters of a percentage point. But the Fed has already raised its key rate by that amount twice this year, with a third expected next week. Some traders even say a gigantic increase of a full percentage point could be possible, following a warmer-than-expected US inflation report on Tuesday.
Partly due to this less aggressive trend, 10-year bonds in Europe and other areas of the world offer much lower yields than US Treasuries, such as 1.75% in Germany and 0.25% in Japan. When investors from Asia and Europe buy Treasuries, they must exchange their currencies for US dollars. This raises the value of the dollar.
A strong dollar helps US tourists, right?
Yes. US travelers to Tokyo who spend 10,000 yen on dinner will use 23% less dollars than a year ago for the same price meal.
With the dollar rising sharply so far this year against everything from the Argentine peso to the Egyptian pound to the South Korean won, the dollar is going further in many countries than before.
Does it only help the rich who can afford to travel abroad?
No. A stronger dollar also helps US buyers by keeping prices for imports in check and pushing inflation down.
When the dollar rises against the euro, for example, European companies earn more euros for every $ 1 they sell. With that pillow, they could cut the dollar price of their products and still earn the same amount of euros. They could also leave the dollar price alone and pocket the extra euros, or they could strike a balance between the two.
Import prices fell 1% in August from the previous month, after falling 1.5% in July, offering some relief amid the nation’s high inflation. For example, the prices of imported fruit, nuts and some peels fell by 8.7%. They are down by 3% compared to the previous year.
A stronger dollar can keep commodity prices in check in general. This is because oil, gold and others are bought and sold in US dollars all over the world. When the dollar rises against the yen, a Japanese buyer can get fewer barrels of crude oil for the same number of yen as before. This may mean less upward pressure on oil prices.
So are there only strong dollar winners?
No. US companies that sell overseas are seeing their profits shrink.
At McDonald’s, revenue fell 3% over the summer from the previous year. But if the dollar’s value had simply stood still against other currencies, the company’s revenue would have been 3% higher. Microsoft, meanwhile, said changes in foreign currency values reduced its revenue by $ 595 million in the last quarter.
A number of other companies have recently issued similar warnings, and further gains for the dollar could add more pressure to profits. Companies in the S&P 500 index get about 40% of their revenue outside of the United States, according to FactSet.
Other collateral damage?
A strong dollar can put a financial squeeze on the developing world. Many companies and governments in these emerging markets borrow money in US dollars rather than their own currencies. When they have to pay off their debts in US dollars, while their own currencies buy fewer dollars by the day, it can create a lot of stress.
Where is the dollar headed from here?
The dollar’s biggest moves may be behind, but many professionals expect the dollar to stay at least that high for a while.
Tuesday’s US inflation report shocked the market and showed it remains more stubborn than expected. This prompted traders to raise bets on Fed rate hikes over the next year. Fed officials were recently pledged to reaffirm their commitment to keep rates high “until the job is done” in breaking the nation’s high inflation, even if it hurts economic growth.
That trend towards even higher rates by the Fed should continue to offer support for the value of the US dollar.
For the dollar to weaken significantly, strategists wrote in a BofA Global Research report, “the Fed needs to worry more about growth than inflation – and we’re not there yet.”