The US Dollar’s Surging Value: A Blessing and a Curse

A Stronger Dollar for Americans

WASHINGTON (AP) — The U.S. dollar has been surging so much that it’s nearly equal in value to the euro for the first time in 20 years. That trend, though, threatens to hurt American companies because their goods become more expensive for foreign buyers. If U.S. exports were to weaken as a result, so, too, would the already-slowing U.S. economy.

Yet there’s a positive side for Americans, too: A stronger buck provides modest relief from runaway inflation because the vast array of goods that are imported to the U.S. — from cars and computers to toys and medical equipment — become less expensive. A strengthened dollar also delivers bargains to American tourists sightseeing in Europe, from Amsterdam to Athens.

The Dollar’s Surge

The U.S. Dollar Index, which measures the value of American money against six major foreign currencies, has jumped nearly 12% this year to a two-decade high. The euro is now worth just under $1.02.

The dollar is climbing mainly because the Federal Reserve is raising interest rates more aggressively than central banks in other countries are in its effort to cool the hottest U.S. inflation in four decades. The Fed’s rate hikes cause yields on U.S. Treasurys to rise, which attracts investors seeking richer yields than they can get elsewhere in the world. This increased demand for dollar-denominated securities, in turn, boosts the dollar’s value.

Why the Euro is Struggling

This year, the euro has sagged largely because of growing fears that the 19 countries that use the currency will sink into recession. The war in Ukraine has magnified oil and gas prices and punished European consumers and businesses.

In particular, Russia’s recent reduction in natural gas supplies has sent prices skyrocketing and raised fears of a total cutoff that could force governments to ration energy to industry to spare homes, schools and hospitals. (European leaders have denounced Moscow’s move as an effort to blackmail Europe for backing Ukraine and embracing Western sanctions in the aftermath of Russia’s invasion.)

Economists at Berenberg bank have calculated that at current rates of consumption the added gas bill would be 220 billion euros ($224 billion) over 12 months, or a whopping 1.5% of annual economic output.

The Impact on American Companies

A sturdier currency takes a toll on U.S. companies that do business overseas. For one thing, it erodes the profits of multinational companies that rely on overseas sales. The stronger dollar makes their foreign revenue worth less when they convert it to dollars and bring it home the United States. Microsoft, for example, last month downgraded the outlook for its April-June earnings “due to unfavorable foreign exchange rate movement.”

Worse, a stronger dollar makes U.S.-made products more expensive in overseas markets, while giving foreign products a price edge in the United States.

“The stronger dollar,” said Mark Zandi, chief economist at Moody’s Analytics, “weighs on (economic) growth as it results in reduced exports, more imports and thus a wider trade deficit.”

Conclusion

In conclusion, the surging value of the US dollar poses both benefits and drawbacks. While it provides relief from inflation and bargains for American tourists, it also threatens to hurt American companies and exports. As the Federal Reserve continues to raise interest rates, the impact of the dollar’s value on the US economy remains uncertain.

FAQs

Q: Why is the US dollar surging?

A: The dollar is surging mainly because the Federal Reserve is raising interest rates more aggressively than central banks in other countries are, which attracts investors seeking richer yields.

Q: What are the benefits of a stronger dollar?

A: A stronger dollar provides modest relief from runaway inflation and delivers bargains to American tourists sightseeing in Europe.

Q: What are the drawbacks of a stronger dollar?

A: A stronger dollar erodes the profits of multinational companies that rely on overseas sales and makes U.S.-made products more expensive in overseas markets, while giving foreign products a price edge in the United States.

Q: How might the surging dollar affect the US economy?

A: The surging dollar poses a risk to the US economy as it may hurt American companies and exports, and lead to a widening trade deficit.

Q: How might the European economy be affected by the surging dollar?

A: The surging dollar may exacerbate Europe’s economic woes, making imports more expensive and leading to higher inflation.