The US dollar is giving off Main Character Energy. The world’s most important currency, accounting for $6 trillion in daily economic activity pre-pandemic, is the strongest it’s been in 20 years. Just last week, USD hit 1:1 parity against the euro for the first time since 2002.
But as a mighty dollar ripples through the global economy in profound ways, its impacts are being felt unequally—for some, it’s a major boost; for others, a drag.
Before we get into winners and losers: Why is this happening? Much of the dollar’s rise can be attributed to the Federal Reserve. In its quest to fight inflation, the Fed has been hiking interest rates harder, faster, and stronger than other central banks around the world. Higher interest rates make the US more attractive to investors looking for a return, and those inflows have pushed the dollar even higher.
American tourists: When the US dollar rises in value compared to foreign currencies, Americans get more bang for their buck when traveling abroad.
Companies that cater to those tourists: All the Americans thronging European cities like Paris this summer are a boon to sellers of luxury goods. UK-based Burberry, for one, said that currency movements would boost revenue by more than $200 million this year.
The Fed: A stronger dollar means lower prices for imports into the US—which is key to the central bank’s goal of bringing down inflation. In the past year, prices of imports (excluding fuel) contributed to half of the increase in consumer prices, per WaPo. But in June, they dropped for the second straight month.
Europe and debt-ridden countries: While a booming dollar may help calm inflation in the US, it has the opposite effect in other countries, where weakening currencies are driving up the costs of imports—particularly oil, which is priced in dollars. Countries with a large share of dollar-denominated debt will also be strained to pay back creditors given the dramatic fall of their currencies relative to the dollar.
American multinationals: US companies that have sizable operations in other countries get hurt by a rising dollar. Their goods become more expensive abroad (and thus less competitive), and their earnings get eroded when converting international sales back to US currency. Last month, a bunch of US companies, including Microsoft, Salesforce, and Costco, warned that the dollar’s surge would cramp profits. As a rule of thumb, an 8%–10% jump in the dollar causes US company profits to drop by 1% on average, Credit Suisse says.
Looking ahead…pressure is mounting on central banks around the world to hike rates in line with the Fed and claw back some of their currencies’ losses against the dollar.