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The value of the US dollar is soaring at a time when there are few clear bright spots in the US economy.
It’s now the strongest it’s been in two decades, and it’s about to get even stronger. The new power of the greenback is disrupting economies and markets around the world and creating winners and losers.
Early on Monday, the pound rose to a record high against the dollar after the UK’s new finance minister announced a package of tax cuts designed to boost the country’s economy.
Never before in history has the value of the US dollar been so close to the pound, and the news generated a sense of urgency for the UK central bank. Bank of England Governor Andrew Bailey issued a statement aimed at reassuring the country, saying the bank was “monitoring developments in the financial markets very closely”.
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Just as in the labor market, where historic lows in unemployment have translated into an abundance of opportunity for workers and yet labor shortages for businesses, the rising dollar above all other currencies had negative effects in both directions.
Recent global shocks, namely the war in Ukraine, have helped drive up the value of the dollar, as investors, companies and other countries often store their reserves in dollars during tumultuous times.
But the main reason for the strength of the dollar is the fight against inflation.
The Federal Reserve is raising interest rates to tackle the current near-steady rise in prices and said last week it expects more hikes this year. As it continues to raise rates, the dollar will strengthen.
Here’s who a strong dollar helps and who it hurts:
For companies that buy goods abroad, purchases are cheaper.
“For importers, this is a positive story,” says Jordan Rochester, senior currency strategist at Nomura Securities. “For anyone importing from China, importing raw metals and energy from overseas, that’s going to be positive for you – as long as the price isn’t in dollars, of course.”
In addition, a strong dollar mitigates the effects of inflation.
For the first time in two decades, the dollar and the euro have reached “parity”, which means that a dollar is worth the same as a euro, and the two currencies are still quite close to equality.
So American travelers can get better deals on hotel rooms and meals when traveling in Europe or elsewhere right now. For them, it’s as if the world is for sale.
Executives of multinational corporations headquartered in the United States have begun to complain that the strong dollar is hurting profits.
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“We had a great quarter, but again the dollar had an even stronger quarter,” Salesforce CEO Marc Benioff said on an earnings call recently.
Salesforce is based in San Francisco, but it sells its software all over the world, in different currencies. Benioff noted that in this fiscal year, a strong dollar will likely cost the company more than $800 million.
Michael Klein, a professor of international economic affairs at Tufts University, says that when a company like Salesforce converts what it earns in another country into dollars, it finds itself under pressure.
“The profits repatriated from abroad, in euros or in pounds or in yen, are going to have less value in dollars, because a dollar is stronger,” he explains.
Two factors are hitting emerging economies particularly hard as the dollar strengthens:
First, most global commodities are denominated in dollars. This means that oil, wheat and soybeans grown in emerging markets are going to be more expensive.
Second, a stronger dollar puts pressure on countries whose debt is denominated in dollars. Interest payments are going to be more expensive, as is refinancing.
Many US exporters
What is good news for importers is not good news for many exporters. When the US dollar is strong, products made in the United States become more expensive – and less attractive to buyers – in other countries.
People living in many other countries where the currency is now weaker than the dollar may think twice before traveling to the United States. As the dollar appreciates, their visits will become more expensive.