The U.S. dollar (“USD”) is the strongest it has been in two decades and will likely get stronger in late 2022 and into 2023. This is impacting the world in positive and negative ways. It certainly is helping to reduce inflation in America. Let’s first take a look at why the USD has been surging and then who is helped and who is hurt.
There are three main reasons for the strong performance of the USD:
- S. Treasuries are the “safe haven” around the world. As we pointed out in our July 23, 2020 blog, 60% of more of the world’s reserve currency is in greenbacks. More than half of all international transactions are done in USD. In times of economic and political turmoil, like now, investors have historically moved to the USD for safety and liquidity. We have strong legal protections and investors are confident that they can access their money at any time.
- The Fed’s major tightening of monetary policy. Rising interest rates make the USD all the more attractive to investors by ensuring a better return. This also means they are investing less in other countries, which puts strains on those economies abroad.
- The relatively strong performance of the U.S. economy. Since the pandemic, the U.S. economy recovery, assisted by strong fiscal and monetary stimulus, has outpaced recoveries in most major countries. The USD GDP (gross domestic product) is 15% higher than pre-pandemic (3Q19) levels. By comparison, the Eurozone is 8% higher and Japan is 4% below 3Q19 levels. According to Schwab’s recent article “The Strong Dollar,” “strong economic growth tends to produce a rising currency.”
For example, the British pound has reached a record low against the dollar. It now takes only $1.05 to buy one pound sterling. In the early 90s, it was $2 for one pound and was $1.35 USD to the pound a year ago. The euro is at near parity with the dollar. Five months ago, 6.4 Chinese Yuan could buy $1, now it takes 7.2- that’s a 11% decline in the cost we pay for most Chinese goods.
The strong USD has helped the following:
- U.S. importers and U.S. consumers. About 20% of consumer spending on goods in the US comes from imports. For anyone importing from China, or importing raw materials or energy from abroad, a strong USD is very positive. American buyers are getting a bargain- A tin of British tea that cost $16 a year ago is now $13. The cost of Belgian chocolates is down by 19%. Christmas gifts made in China should be much less. Cheaper imports are helping to push down inflation.
- U.S. travelers. The USD now buys more across the world. With the exchange rate so much more in our favor, the net cost of hotel rooms and meals are much cheaper across Europe or anywhere else right now. The USD also goes much farther these days if one is considering buying a home in England or Europe.
The strong USD hurts the following:
- Multinational companies’ profits are being hurt. Salesforce, for example, sells software all over the world, in different currencies. When Salesforce converts what it earns in another country into dollars, the profit is reduced. CEO Marc Benioff says the strong dollar will cost the company $800 million this year.
- Small and poor countries. These countries often borrow money for which the interest and principal needs to be repaid in USD, regardless of the exchange rate. Compared to a year ago, payment of $100 for oil or a debt payment would now cost $124 to Egypt and $122 to South Korea, due the strong USD.
- Many U.S. exports. U.S. goods are now more expensive and therefore less attractive to foreign buyers.
- U.S. tourism. Similarly, tourism to the U.S. is down and is not expected to return to come back until 2025.
Conclusion: The strong USD is helping reduce inflation at home and reducing costs for imports and international travel. At the same time, it reduces U.S. exports and U.S. multinational profits. It is expected that the dollar will stay strong into 2023. So, you might consider buying internationally made gifts for the Holidays and then using the savings to travel abroad in 2023. There are some real benefits to living in America.