The value of the U.S. dollar is the strongest it has been in a generation, devaluing currencies around the world and unsettling the outlook for the global economy as it upends everything from the cost of a vacation abroad to the profitability of multinational companies.
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The dollar lubricates the global economy. It is one side of about 90 percent of all foreign exchange transactions, accounting for $6 trillion in activity every 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 in times of turmoil, in part because investors consider it to be relatively safe and stable. Its performance is often seen as a marker of global economic health: The dollar has gained in recent months as inflation has soared, interest rates have increased and the outlook for growth has worsened. “That’s a pretty tough mix,” said Kamakshya Trivedi, co-head of a market research group at Goldman Sachs.
The main way to gauge the dollar’s strength is by indexing it against a basket of currencies of major trading partners like 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 shifts by tiny fractions each day.
In the past week, the yen sank to a 24-year low against the dollar and the euro fell to parity, a one-for-one exchange rate, with the dollar for the first time since 2002. But pick just about any currency — the Colombian peso or the Indian rupee, the Polish zloty or the South African rand — and it has probably lost value against the dollar, especially over the past 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. chair of the Official Monetary and Financial Institutions Forum, a think tank. Broadly speaking, the dollar has been stronger on only three occasions since the 1960s.
The factors roiling 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 more quickly and more aggressively than most. As a result, interest rates are now markedly higher in the United States than they are in many other large economies, luring investors attracted by the higher returns on even relatively conservative investments such as Treasury bonds. As money has poured in, the value of the dollar has increased.
Analysts at Bank of America estimated that more than half the rise in the dollar this year could be explained by the Fed’s comparatively aggressive policy alone.
The analysts cited its status as a haven in times of worsening economic conditions and stock market turmoil. They also said the dollar was rising because high energy prices were hitting the economies of importers, like most of Europe, harder than the United States, which is less reliant on buying oil and gas from abroad.
“This is a perfect setup for the dollar,” said Calvin Tse, a markets strategist at BNP Paribas. “Not only are recessionary fears rising but the U.S. also looks better off than the rest of the world.”
While a stronger dollar can be a mixed blessing for people and companies, such a sharp, quick move in the value of the world’s most widely used currency can have a destabilizing effect of its own.
Americans traveling abroad this summer will find that their money goes further. “One of the only ways an American can reap the rewards of a strong dollar is by going on holiday,” said Max Gokhman, the chief investment officer at AlphaTrAI, an asset management firm. “But even then, the airfare is going to be much more expensive because of the rise in oil prices.”
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How currencies have dropped against the dollar
The dollar lubricates the global economy. It is one side of about 90 percent of all foreign exchange transactions, accounting for $6 trillion in activity every 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 in times of turmoil, in part because investors consider it to be relatively safe and stable. Its performance is often seen as a marker of global economic health: The dollar has gained in recent months as inflation has soared, interest rates have increased and the outlook for growth has worsened. “That’s a pretty tough mix,” said Kamakshya Trivedi, co-head of a market research group at Goldman Sachs.
The main way to gauge the dollar’s strength is by indexing it against a basket of currencies of major trading partners like 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 shifts by tiny fractions each day.
In the past week, the yen sank to a 24-year low against the dollar and the euro fell to parity, a one-for-one exchange rate, with the dollar for the first time since 2002. But pick just about any currency — the Colombian peso or the Indian rupee, the Polish zloty or the South African rand — and it has probably lost value against the dollar, especially over the past 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. chair of the Official Monetary and Financial Institutions Forum, a think tank. Broadly speaking, the dollar has been stronger on only three occasions since the 1960s.
The factors roiling 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 more quickly and more aggressively than most. As a result, interest rates are now markedly higher in the United States than they are in many other large economies, luring investors attracted by the higher returns on even relatively conservative investments such as Treasury bonds. As money has poured in, the value of the dollar has increased.
Analysts at Bank of America estimated that more than half the rise in the dollar this year could be explained by the Fed’s comparatively aggressive policy alone.
The analysts cited its status as a haven in times of worsening economic conditions and stock market turmoil. They also said the dollar was rising because high energy prices were hitting the economies of importers, like most of Europe, harder than the United States, which is less reliant on buying oil and gas from abroad.
“This is a perfect setup for the dollar,” said Calvin Tse, a markets strategist at BNP Paribas. “Not only are recessionary fears rising but the U.S. also looks better off than the rest of the world.”
While a stronger dollar can be a mixed blessing for people and companies, such a sharp, quick move in the value of the world’s most widely used currency can have a destabilizing effect of its own.
Americans traveling abroad this summer will find that their money goes further. “One of the only ways an American can reap the rewards of a strong dollar is by going on holiday,” said Max Gokhman, the chief investment officer at AlphaTrAI, an asset management firm. “But even then, the airfare is going to be much more expensive because of the rise in oil prices.”
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