What does a strong dollar mean for the U.S. and world economies?
What does a strong dollar mean for the U.S. and world economies?
By some measures, the U.S. dollar is at its strongest relative to the euro and yen in 20 years. As is often the case with market forces, that is good news for some and bad news for others.
The dollar is strong right now for a few reasons. After years of easy money, the Federal Reserve is raising interest rates.
“We saw this back post-great financial crisis and we’re seeing this now as we move past the pandemic,” according to Win Thin, global head of currency strategy at Brown Brothers Harriman.
Higher interest rates mean higher returns for investors, and money goes where money grows. So that’s been bidding up the price of the dollar.
Things have hit the fan in a few places around the world and the U.S. is looking pretty good by comparison, said Rajesh Nakadi, head of investments at BNY Mellon Wealth Management’s global family office.
“There was the Russia-Ukraine war and then secondly the zero-COVID policy in China,” he said. When freaked out, global investors typically pile their cash into the U.S. for safekeeping. Again, bidding up the dollar.
What does all this mean for economies everywhere? For the U.S., there is at least one clear benefit.
“It actually helps us with the inflation problem because the stronger the dollar is, the lower import prices are,” said Vassili Serebriakov, an FX strategist at UBS.
For the rest of the world, it’s a mixed bag. The U.S. is buying more of the world’s goods, which helps. On the other hand, the things the world buys are getting more expensive. Commodities like oil and nickel are all priced in dollars, so if a country needs to buy a bunch of oil or nickel, they will have to pay extra to convert their currency into dollars to buy it.
“For the emerging economies that are commodity importers such as China and India, it’s particularly impactful to have a higher dollar price for commodities they need to pull in,” said Alan Robinson, vice president with RBC Wealth Management..
These analysts say the dollar is likely going to remain strong for the next three months, possibly to the end of the year.
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