I’ve read a lot of news about the U.S. dollar growing stronger. What does this mean for the global and national economy and how might it impact me?A strong U.S. dollar has significant effects on all parts of the economy, but its exact ramifications can be confusing. Here are all your questions about a strong U.S. dollar – answered.
What does a strong U.S. dollar mean?
A dollar is a dollar is a dollar … right? Well, not exactly. When the dollar grows stronger, its purchasing power in foreign countries increases. You can now buy more of another currency with this dollar than you could just a year or two ago. For instance, the euro, which is used by 19 European countries, reached a 1:1 ratio with the dollar in June 2022 for the first time in 20 years. And it’s not just the euro that’s been affected. In 2021, $1 could be exchanged for less than 110 Japanese yen. Now, that same dollar can buy approximately 148 yen.
It’s important to note that many investors view the dollar as the best asset to hold during times of a volatile stock market. This is because the dollar is considered the world’s “reserve currency,” or the currency that financial institutions around the globe keep large amounts of to use for international transactions.
Why is the dollar growing stronger?
The primary reason the U.S. dollar is currently strong is because the U.S. economy is healthier than the economy of most developing nations around the world. Europe, in particular, is challenged with high levels of inflation and lagging growth due to energy supply disruptions caused by the war in Ukraine. In addition, the Federal Reserve has raised the national interest rate several times over the past year, further increasing the dollar’s strength.
What are some advantages of a strong dollar?
A strong dollar has several advantages for the economy and the average American citizen.
- Cheaper overseas travel. Local prices in foreign countries are not affected by changes in the U.S. economy. The dollar’s exchange rate against other currencies is now higher, and dollars can buy more goods when converted to a local currency abroad.
- Lower cost of living for expatriates. U.S. citizens who are living and/or working abroad, but getting paid in U.S. dollars, will see the cost of their day-to-day expenses decrease.
- Cheaper imports. Goods produced overseas and imported to the U.S. are now less expensive. For example, luxury cars manufactured abroad, including Audi, Mercedes, BMW and more, are now cheaper when their price is converted to dollars. To illustrate, if one of these cars were priced at €70,000 with an exchange rate of 1.35 dollars per euro, it would cost $94,500. But, if the exchange rate drops to 1.12 dollars per euro, that same car would cost only $78,400.
- Multinationals doing business in the U.S. are earning more. Foreign companies earning income in dollars will be earning more profits now.
What are some disadvantages of a strong dollar?
A strong U.S. dollar can negatively impact the economy and the private consumer in multiple ways:
- U.S. tourism is more expensive. With foreign currencies trading in for fewer U.S. dollars, traveling to the States is now more expensive for foreigners. This can have a negative effect on the tourism industry in the U.S. and beyond.
- U.S. exports are more expensive. Goods being produced in the U.S. and sold abroad now cost more. This applies to large items, like cars, and smaller items, like clothing and electronics.
- U.S. companies doing business abroad are earning less. With foreign currencies converting into fewer dollars, U.S. companies earning income in any currency other than U.S. dollars, and then converting this income to dollars, are turning a lower profit now.
Will the U.S. dollar continue to be this strong for the foreseeable future?
While the dollar has continued to grow stronger for a prolonged period of time, economists predict that foreign goods now being so inexpensive will soon rise in demand, thus raising their prices. Concurrently, domestic exports will decrease in price as demand for these items declines. Ultimately, they expect an equilibrium to be achieved and for the U.S. dollar to stabilize in strength at that time. The dollar has already begun to drop in value, but it’s anyone’s guess as to when it will stabilize completely.
A strong U.S. dollar has both negative and positive effects on the global and national economy.