The strongest dollar in a generation shakes up the global economy and devalues ​​currencies

The dollar lubricates the global economy. It’s a side of about 90% of all foreign exchange transactions, accounting for $6 trillion of activity each day before the pandemic, from tourists using their credit cards to businesses making large international investments.

As the world’s most important currency, the dollar often appreciates during turbulent times, in part because investors view it as relatively safe and stable. The dollar has appreciated in recent months as inflation has soared, interest rates have risen and concerns about growth have deepened. “It’s a pretty tough mix,” said Kamakshya Trivedi, co-head of a market research group at Goldman Sachs.

The main way to gauge the strength of the dollar is to peg it to a basket of currencies from major trading partners like Japan and the Eurozone. By this measure, the dollar is at its highest level in 20 years, having gained more than 10% this year, a huge move for an index that typically moves tiny fractions every day.

Last week, the yen fell to its lowest level in 24 years against the dollar and the euro fell to parity, a one-to-one exchange rate, with the dollar for the first time since 2002. But choose to pretty much any currency — the Colombian peso or the Indian rupee, the Polish zloty or the South African rand — and it’s probably lost value against the dollar, especially in the last six months or so.

As central bankers around the world attempt to rein in inflation by raising interest rates, the Federal Reserve is moving faster and more aggressively than most. As a result, rates are now significantly higher in the United States than they are in many other major economies, attracting investors lured by the higher yields of even relatively conservative investments such as Treasuries. As the money flowed in, the value of the dollar rose.

“It’s a very, very strong dollar,” said Mark Sobel, a former Treasury official who is now the US chairman of the Official Monetary and Financial Institutions Forum, a think tank. The currency has only been stronger three times since the 1960s.

Bank of America analysts have estimated that more than half of the dollar’s rise this year could be explained by relatively aggressive Fed policy alone.

Analysts have cited its safe-haven status amid deteriorating economic conditions and stock market turbulence. They also said the dollar was rising because high energy prices were hitting the economies of importers, including most of Europe, harder than the United States, which is less dependent on buying oil. and gas abroad.

While a stronger dollar can be a mixed blessing for individuals and businesses, such a sharp and rapid change in the value of the world’s most widely used currency can have a destabilizing effect in itself.

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 to go on vacation,” said Max Gokhman, chief investment officer at AlphaTrAI, an asset management firm. “But even then the plane ticket is going to be a lot more expensive because of the rising oil prices.”

Companies based outside the United States saw their sales supported by the strength of the dollar. Burberry, the British luxury goods maker, said on Friday it would add more than $200 million to its sales this year due to currency movements, helping to offset a drop in sales in China , where the economy is slowing down.

But U.S. companies with large international operations are hurt when they convert their overseas sales back into dollars. The profits of Microsoft and Nike, for example, have recently eroded. Apple makes more than 60% of its sales outside the United States; it and other tech giants, which dominate many stock indexes, are expected to suffer from the strong dollar when they release their latest financial results in the coming weeks.

Ben Laidler, global markets strategist at eToro, estimates the rising dollar will shave 5% off earnings growth for S&P 500 companies this year, or about $100 billion. That’s a big impact given that earnings for these companies are expected to rise about 10% this year, according to FactSet.

Reflecting the drag, companies that generate most of their revenue in the United States have performed better than their rivals with more international exposure, according to indexes compiled by S&P Dow Jones Indices.

Many companies and governments abroad borrow in dollars, and the strength of the currency is a big issue. This is especially true for poorer countries attracted to dollar-denominated debt as an alternative to less developed local markets.

©2022 New York Times News Service

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