The value of the U.S. dollar is at its highest in a generation, devaluing currencies around the world and upsetting the outlook for the global economy as it changes everything from the cost of vacations abroad to the profitability of multinational companies.
How currencies have fallen against the dollar
The percentage change
to July 15 from December 31
official of each party
currency against the US dollar.
The percentage change as of July 15
from December 31 of each country
official currency against the US dollar.
Source: FactSet
The dollar is crushing the world economy. It was one side of about 90 percent of all currency transactions, amounting to $6 trillion each day before the pandemic, from tourists using their credit cards to companies making major international investments.
As the world’s most important currency, the dollar often rises during times of turmoil, in part because investors view it as relatively safe and stable. Its performance is often seen as a marker of global economic health: The dollar has appreciated in recent months as inflation has risen, interest rates have risen and growth prospects have worsened. “It’s a pretty tough combination,” said Kamakshya Trivedi, co-head of the market research group at Goldman Sachs.
The main way to measure the dollar’s strength is by indexing it against a basket of currencies of major trading partners such as Japan and the Eurozone. By that measure, the dollar is at a 20-year high after gaining more than 10 percent this year, a huge move for an index that typically moves by small fractions each day.
Source: Refinitiv The index includes the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc weighted against the US dollar.
In the past week, the yen sank to a 24-year low against the dollar and the euro fell to parity, a one-to-one exchange rate, against the dollar for the first time since 2002. But pick almost any currency – the Colombian peso or the Indian rupee, the Polish zloty or the South African rand – and has probably lost value against the dollar, especially in the last six months or so.
“It’s a very, very strong dollar,” said Mark Sobel, a former U.S. Treasury official who now serves as the U.S. chairman of the Monetary and Financial Institutions Forum, a think tank. Broadly speaking, the dollar has only been stronger three times since the 1960s.
The factors agitating the global economy partly explain why the dollar has suddenly become so much stronger.
As central bankers around the world try to tame inflation by raising interest rates, the Federal Reserve is moving faster and more aggressively than most. As a result, interest rates are now significantly higher in the United States than in many other major economies, luring investors attracted by the higher returns of even relatively conservative investments such as Treasuries. As the money poured in, the value of the dollar increased.
Analysts at Bank of America estimated that more than half of the dollar’s growth this year can be explained by the Fed’s relatively aggressive policy alone.
Analysts pointed to its safe haven status in times of deteriorating economic conditions and stock market turmoil. They also said the dollar was rising because high energy prices were hitting the economies of importers, such as most of Europe, harder than the United States, which is less dependent on buying oil and gas from abroad.
“This is a perfect setup for the dollar,” said Calvin Tse, market strategist at BNP Paribas. “Not only are recession fears rising, but the US is looking better than the rest of the world.”
While a stronger dollar can be a mixed blessing for people and companies, such a sharp, rapid movement in the value of the world’s most widely used currency can have its own destabilizing effect.
Americans traveling abroad this summer will find their money goes further. “One of the only ways an American can reap the benefits of a strong dollar is by going on vacation,” said Max Gochmann, chief investment officer at AlphaTrAI, an asset management firm. “But even then, plane tickets will be much more expensive because of the rise in oil prices.”
Companies based outside the United States saw their sales boosted by the strong dollar. Burberry, the British luxury goods maker, said on Friday it would add more than $200 million to its earnings this year due to currency movements – helping to offset a decline in sales in China, where the economy is slowing.
But U.S. companies with large international operations take a hit when they convert foreign sales back into dollars. Profits at both Microsoft and Nike, for example, have recently fallen. Apple generates more than 60 percent of its sales outside the United States; it and other tech giants that dominate many stock indexes are likely to be hurt by the dollar’s strength when they release their next batch of financial reports in the coming weeks.
Ben Laidler, global market strategist at eToro, estimates that the rising dollar will cut 5 percent of S&P 500 companies’ earnings growth this year, or roughly $100 billion. That’s a significant impact, given that earnings at S&P 500 companies are expected to grow about 10 percent this year, according to FactSet.
Reflecting the drag, companies that generate most of their revenue in the United States are outperforming rivals with more international exposure, according to indexes compiled by S&P Dow Jones Indices.
Stock presentation of
S&P 500 companies with
more exposure in:
Stock presentation of
S&P 500 companies with
more exposure in:
Source: Refinitiv Data is the percentage change since December 31, 2021 in the S&P 500 US Revenue Exposure Index and the S&P 500 Foreign Revenue Exposure Index, which include companies with above- or below-average revenues derived either in the U.S. or foreign countries .
Many companies and governments abroad borrow in dollars and the strength of the currency is a big problem. This is especially true for poorer countries attracted to dollar-denominated debt as an alternative to less developed domestic markets. As John B. Connolly, former Treasury Secretary, told his colleagues at a summit in the early 1970s, “The dollar is our currency, but it’s your problem.”
Countries where dollar-denominated debt represents a large proportion of the country’s gross domestic product are likely to be most affected. Paying interest to dollar creditors has become particularly difficult for countries with rapidly depreciating currencies such as Argentina and Turkey, especially since interest rates on any new debt will also rise. In some cases, including Sri Lanka, this has become seemingly impossible.
However, the dollar has not beaten every currency this year. Rising energy and food prices, which accelerated after Russia’s invasion of Ukraine, were favorable to the currencies of countries such as Angola, a major oil producer; Uruguay, a major food exporter; and Brazil, which sells a lot of energy and agricultural goods.
The Russian ruble, perhaps surprisingly, has been one of the best performing currencies against the dollar this year. High oil and gas prices, as well as capital controls imposed by Russia to keep money in the country, supported the official exchange rate. The small ruble and dollar exchanges that ordinary Russians can make are likely to be at a weaker rate.
The percentage change as of July 15
from December 31 of each country
official currency against the US dollar.
The percentage change as of July 15
from December 31 to the official of each country
currency against the US dollar.
Source: FactSet
Can the money be stopped? Few analysts are betting that his power will soon wane, even after such a remarkable performance. The US economy looks more volatile, but as Europe faces an energy crisis, Japan resists raising interest rates, China’s Covid-19 lockdown policies upset its supply chains and other countries reel under the weight of high inflation, demand for the dollar appears stable. Although it remains unclear for how long.
“For now, we still expect the dollar to trade on top,” said Mr. Trivedi of Goldman Sachs. “There may be a little bit more to come, but probably most of the dollar’s movement may be behind us.”
Analysts at Bank of America noted that they were “struck by our conversations with investors focused on what could lead to a spike” in the value of the dollar, “as opposed to what makes it another 10 percent stronger.”
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