The value of the US dollar is the strongest it has had in a generation, devaluing currencies around the world and disturbing the prospects of the global economy, as it turns everything upside down, from the cost of a holiday to abroad to the profitability of multinational companies.
How the coins have fallen against the dollar
The percentage change
to July 15, December 31,
official of each country
currency against the US dollar.
The percentage change until July 15
from 31 December in each country
official currency against the US dollar.
Source: FactSet
The dollar lubricates the global economy. It is a side of about 90 percent of all foreign exchange transactions, which account for $ 6 trillion in activity every day before the pandemic, from tourists using their credit cards to companies making large investments. international.
As the world’s largest currency, the dollar often rises in turmoil, in part because investors consider it relatively safe and stable. Its performance is often seen as an indicator of global economic health: the dollar has gained in recent months as inflation has soared, interest rates have risen and growth prospects have worsened. “This is a pretty tough mix,” said Kamakshya Trivedi, co-head of a market research group at Goldman Sachs.
The main way to assess the strength of the dollar is by indexing it against a basket of currencies from major trading partners such as Japan and the eurozone. With this measure, the dollar is at its 20-year high, having gained more than 10 percent this year, a huge move for an index that typically moves in small fractions every day.
Source: Refinitive The index comprises the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc weighted against the US dollar.
Last week, the yen sank to a 24-year low against the dollar and the euro fell to parity, a one-on-one exchange rate, with the dollar for the first time since 2002. But choose 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 over 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 U.S. president of the Official Forum of Monetary and Financial Institutions, a think tank. Overall, the dollar has only been stronger three times since the 1960s.
Factors affecting the global economy partly explain why the dollar has suddenly become much stronger.
As central banks around the world try to control inflation by raising interest rates, the Federal Reserve is moving faster and more aggressively than most. As a result, interest rates are now noticeably higher in the United States than in many other large economies, attracting investors attracted by higher returns even from relatively conservative investments, such as Treasury bonds. . As the money has poured in, the value of the dollar has increased.
Bank of America analysts estimated that more than half of the dollar’s rise this year could be explained only by the Fed’s relatively aggressive policy.
Analysts cited its refuge status in times of worsening economic conditions and stock market turmoil. They also said the dollar was rising because high energy prices were affecting the economies of importers, like most of Europe, more strongly than the United States, which is less dependent on buying oil and gas. foreign.
“This is a perfect setup for the dollar,” said Calvin Tse, BNP Paribas market strategist. “Not only do fears of recession increase, but the US also looks better than the rest of the world.”
While a stronger dollar can be a mixed blessing for people and businesses, such a sharp and rapid move in the value of the world’s most widely used currency can have a destabilizing effect on its own.
Americans traveling abroad this summer will discover that their money goes further. “One of the only ways an American can get the fruits of a strong dollar is to go on vacation,” said Max Gokhman, chief investment officer of AlphaTrAI, an asset management company. “But even then, the air ticket will be much more expensive due to rising oil prices.”
Companies based outside the United States have seen their sales strengthened by the strength of the dollar. Burberry, the British luxury goods maker, said on Friday it would add more than $ 200 million to its revenue this year due to currency movements, helping offset falling sales in China, where the economy is slowing down.
But U.S. companies with large international operations are getting hit once they turn overseas sales back into dollars. The profits of both Microsoft and Nike, for example, have recently eroded. Apple generates more than 60 percent of its sales outside the United States; He and other tech giants, which dominate many stock indices, are likely to suffer from the strength of the dollar when they reveal their next batch of financial reports in the coming weeks.
Ben Laidler, eToro’s global market strategist, estimates that the dollar’s rise will reduce the S&P 500’s corporate profit growth by 5% this year, or about $ 100 billion. This is a major impact as profits among S&P 500 companies are expected to grow by about 10 percent this year, according to FactSet.
As a reflection of the drag, firms that generate most of their revenue in the United States have performed better than rivals with the most international exposure, according to indices compiled by S&P Dow Jones Indices.
Yield on shares of
S&P 500 companies with
more exposure to:
Yield on shares of
S&P 500 companies with
more exposure to:
Source: Refinitiv Data are the percentage change since December 31, 2021 in the U.S. S&P 500 revenue exposure index and the S&P 500 foreign revenue exposure index, which include companies with incomes above or below the average obtained in the US. or foreign countries.
Many overseas companies and governments take out dollar loans, and the strength of the currency is a big problem. This is especially true for poorer countries attracted by dollar-denominated debt as an alternative to less developed local markets. As John B. Connally, a former Treasury secretary, told his counterparts at a summit in the early 1970s: “The dollar is our currency, but it’s your problem.”
The countries most affected are countries where dollar debt accounts for a large share of a country’s gross domestic product. Paying interest to dollar creditors has become especially difficult for countries with rapidly depreciating currencies such as Argentina and Turkey, especially because interest rates on any new debt will also rise. In some cases, including for Sri Lanka, it has become seemingly impossible.
The dollar, however, has not gained all the currencies this year. Rising energy and food prices, which accelerated after Russia’s invasion of Ukraine, have been a welcome addition to the currencies of countries like Angola, a major oil producer; Uruguay, a major food exporter; and Brazil, which sells a lot of energy and agricultural raw materials.
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 inside the country, have propped up the official exchange rate. The small ruble-dollar exchanges that ordinary Russians are able to make are likely to be at a slower pace.
The percentage change until July 15
from 31 December in each country
official currency against the US dollar.
The percentage change until July 15
as of December 31 of the official of each country
currency against the US dollar.
Source: FactSet
Can the dollar be stopped? Few analysts bet that their strength will diminish soon, even after such a remarkable career. The U.S. economy seems more uncomfortable, but as Europe faces an energy crisis, Japan is reluctant to raise interest rates, China’s Covid-19 blockade policies wrap up its supply chains. supply and other countries are swinging under the weight of high inflation, dollar demand seems robust. Although it is not yet clear how long.
“For now, we still expect the dollar to trade ahead,” Mr. Trivedi by Goldman Sachs. “There may be a little more to go through, but probably most of the dollar movement may be behind it.”
Bank of America analysts noted that they were “surprised by our investors’ conversations focusing on what could cause a spike” in the value of the dollar, “as opposed to what makes it 10% stronger.”