NEW YORK — The ball does not stop.
The value of the US dollar has been on the rise for more than a year against everything from the British pound across the Atlantic to the South Korean won across the Pacific.
After rising again on Friday, the dollar is near its highest level in more than two decades against a key index that measures six major currencies, including the euro and the Japanese yen. Many professional investors don’t expect it to go away any time soon.
The rise of the dollar affects almost everyone, even those who will never leave US borders. Here’s a look at what’s boosting the US dollar and what it may mean for investors and households:
What does it mean to say that the dollar is stronger?
Essentially, that one dollar can buy more of another currency than ever before.
Consider the Japanese yen. A year ago, $1 could cost a little less than 110 yen. Now, you can buy 143. That’s about 30% more and one of the biggest moves the US dollar has ever made against any other currency.
The values of currencies are constantly changing relative to each other as they are bought and sold by banks, businesses, and traders in time zones around the world.
The US dollar index, which measures the dollar against the euro, yen and other major currencies, is up more than 14% this year. The gain looks even more impressive compared to other investments, most of which have had a lousy year. US stocks are down more than 19%, bitcoin is more than halved, and gold is down 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, like the service sector, have been resilient.
That helped offset concerns about a slowdown in the housing industry and other parts of the economy that work better when interest rates are low. That, in turn, has traders hoping the Federal Reserve will make good on its promise to continue to slash interest rates and keep them there for a while, in hopes of bringing down the worst inflation in 40 years.
Such expectations have helped the yield on a 10-year Treasury more than double to 3.44% from about 1.33% a year ago.
Who cares about bond yields?
Investors who want to get more income from their money. And those juicier US yields are attracting investors from around 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 largest amount in history, 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 are even saying a gargantuan full percentage point rise could be possible, following a more positive-than-expected report on US inflation on Tuesday.
In part because of that less aggressive slant, 10-year bonds in Europe and other areas of the world offer much lower yields than US Treasuries, such as Germany’s 1.75% and Germany’s 0.25% % from Japan. When investors in Asia and Europe buy Treasury bonds, they have to exchange their own currencies for US dollars. That raises the value of the dollar.
A strong dollar helps American tourists, right?
Yes. American travelers in Tokyo who spend 10,000 yen on dinner will use 23% fewer dollars than they did a year ago for the same price meal.
With the dollar rising strongly so far this year against everything from the Argentine peso to the Egyptian pound to the South Korean won, the dollar is going further than before in many countries.
Does it help only rich people who can afford to travel abroad?
No. A stronger dollar also helps US shoppers by controlling import prices and pushing down inflation.
When the dollar rises against the euro, for example, European companies earn more euros for every dollar of sales. With that cushion, they could lower 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 find some balance between the two.
Import prices fell 1% in August from the previous month, following July’s 1.5% drop, offering some relief amid the country’s high inflation. The prices of imported fruit, nuts and some shells fell 8.7%, for example. They are down 3% from the previous year.
A stronger dollar may keep prices in check for commodities in general. That’s 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 amount of yen as before. That may mean less upward pressure on oil prices.
So are there only winners from a strong dollar?
No. American companies selling abroad are seeing their profits shrink.
At McDonald’s, revenue fell 3% during the summer from a year earlier. But if the value of the dollar had simply held up against other currencies, the company’s revenue would have been 3% higher. Meanwhile, Microsoft said changes in foreign currency values shaved $595 million off its revenue in the latest quarter.
A number of other companies have issued similar warnings recently and further gains for the dollar could add further pressure on earnings. Companies in the S&P 500 index derive about 40% of their revenue from outside the United States, according to FactSet.
Any other collateral damage?
A strong dollar can put financial pressure on the entire developing world. Many companies and governments in these emerging markets borrow money in US dollars, rather than their own currencies. When you have to pay your debts in US dollars, while your own currencies buy fewer dollars per day, it can create a lot of stress.
Where does the dollar go from here?
Further dollar moves may be behind this, but many professionals expect the dollar to remain at least this high for a while.
Tuesday’s report on US inflation shocked the market and showed that it remains more stubborn than expected. That has traders increasing their bets on Fed rate hikes for next year. Fed officials have been busy recently reaffirming their commitment to keeping rates high “until the job is done” to break the nation’s high inflation, even if it hurts economic growth.
That bias towards even higher rates on the part of 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 has to worry more about growth than inflation, and we’re not there yet.”