The dollar hit a record last week, and the Bloomberg Dollar Spot Index has climbed 10% this year. That constitutes a major move in the currency market.
The dollar has benefited from the U.S. economy’s strength relative to those overseas and from the Federal Reserve’s bigger interest-rate hikes compared with those of foreign central banks.
Also boosting the greenback: America's lesser dependence on foreign energy than overseas economies have. We don’t have to worry about Russia cutting off natural-gas sales, as it has done to Europe.
“All of those various factors are making us a safe haven, a mecca for capital. And that’s causing resources to flow into the dollar,” Harvard economist Larry Summers told Bloomberg.
“It’s remarkable that people were saying the dollar’s day was past not very long ago given its current strength,” the former treasury secretary said. “My guess is that there’s room for this to continue.”
So what does the greenback’s climb mean for you?
Falling Import Prices
First it means that import prices are cheaper in dollar terms. Those prices dropped 1.4% in July from June. That should put downward pressure on prices of things you buy from overseas — say, French clothes.
A rising dollar also means falling prices of commodities, which are priced in dollars. The price of oil has slid 28% since June 8. Gasoline, of course, is refined from crude oil. So you are enjoying lower prices at the pump.
Gas prices stood at $3.72 a gallon as of Sept. 12, down 26% from the record $5.02 June 14.
The ascending dollar also makes it cheaper to travel overseas, as you can purchase more foreign currency with your dollars now than you could before.
The euro has lost 8% over the past six months. That means if you go to one of the eurozone countries, Italy, for example, your purchases will cost you 8% less in dollars than they would have in March.
The Downside
To be sure, there is a downside to the dollar’s strength. Companies like Microsoft (MSFT) that sell their products extensively abroad are seeing the value of their sales in foreign currency drop in dollar terms.
That’s because the foreign currencies are sliding against the dollar. This means less profit for these companies, which in turn can mean lower stock prices.
In addition, if you own shares in a foreign stock or bond fund, the value of the fund is dropping in dollar terms. That’s because the fund’s holdings are priced in foreign currencies.
But the good news is that many international stock and bond funds hedge their currency exposure. In that case, the rising dollar won’t cause you any harm.
Looking at all the implications together, if the dollar keeps ascending, as Summers expects, you’re likely to be better off.
