The Federal Reserve’s aggressive rate hikes have driven the U.S. dollar to its highest value in decades.
The strong dollar is treating American tourists to bargains in Europe and Asia and discounting imported goods here at home. On the flip side, the rising dollar is squeezing the economies of several U.S. trading partners, making their fight against inflation tougher still. As imports become cheaper in America, domestically produced goods become more expensive abroad; for example, a GM car that costs $30,000 would cost €22,222 with an exchange rate of 1.35 dollars per euro, but increases to €26,786 with a dollar valued at 1.12 per euro.
Years of low inflation and low interest rates have given way to a more volatile era in wake of the war in Ukraine. “The dollar, euro, yen and yuan moved in relatively small ranges for a very long time. This is the first time in decades where everybody’s down against the dollar,” said Adam Posen of the Peterson Institute for International Economics.
The robust greenback is evidence that the Fed’s plan to curb inflation is working, even as inflation accelerated to 9.1 percent in July. However, the stronger dollar is straining the economies of countries like India, South Korea, and Thailand; these countries are heavily dependent on oil imports, which are priced in dollars. Developing countries dependent on U.S. dollar reserves, like Ecuador and Tunisia, are also hurting since they must pay more to obtain those dollars.
This year, the Fed has raised rates twice by a total of 75 basis points and investors expect an additional three-quarters-of-a-point raise at its next meeting later this month. Many analysts have criticized how slowly the Fed’s rate hikes have come, but its response has been drastic compared to that of other central banks. The European Central Bank is expected raise rates for the first time in 11 years at its July 21 meeting, and only by 25 basis points.
Still, a stronger dollar isn’t all good news for the United States. In general, U.S. companies derive 30% of their revenue from overseas, according to Morgan Stanley. This hurts major exporters like Boeing and Exxon Mobil especially, shrinking their overseas earnings and in turn their stock values. Boeing recently lost an order of 300 jets to European-based airbus since the lower Chinese yuan makes it more expensive to buy American-made planes.
The strong dollar is treating American tourists to bargains in Europe and Asia and discounting imported goods here at home. On the flip side, the rising dollar is squeezing the economies of several U.S. trading partners, making their fight against inflation tougher still. As imports become cheaper in America, domestically produced goods become more expensive abroad; for example, a GM car that costs $30,000 would cost €22,222 with an exchange rate of 1.35 dollars per euro, but increases to €26,786 with a dollar valued at 1.12 per euro.
Years of low inflation and low interest rates have given way to a more volatile era in wake of the war in Ukraine. “The dollar, euro, yen and yuan moved in relatively small ranges for a very long time. This is the first time in decades where everybody’s down against the dollar,” said Adam Posen of the Peterson Institute for International Economics.
The robust greenback is evidence that the Fed’s plan to curb inflation is working, even as inflation accelerated to 9.1 percent in July. However, the stronger dollar is straining the economies of countries like India, South Korea, and Thailand; these countries are heavily dependent on oil imports, which are priced in dollars. Developing countries dependent on U.S. dollar reserves, like Ecuador and Tunisia, are also hurting since they must pay more to obtain those dollars.
This year, the Fed has raised rates twice by a total of 75 basis points and investors expect an additional three-quarters-of-a-point raise at its next meeting later this month. Many analysts have criticized how slowly the Fed’s rate hikes have come, but its response has been drastic compared to that of other central banks. The European Central Bank is expected raise rates for the first time in 11 years at its July 21 meeting, and only by 25 basis points.
Still, a stronger dollar isn’t all good news for the United States. In general, U.S. companies derive 30% of their revenue from overseas, according to Morgan Stanley. This hurts major exporters like Boeing and Exxon Mobil especially, shrinking their overseas earnings and in turn their stock values. Boeing recently lost an order of 300 jets to European-based airbus since the lower Chinese yuan makes it more expensive to buy American-made planes.
