The ‘very, very strong’ US dollar is weighing down the world

NEW YORK (NYTIMES) – The value of the US dollar is the strongest it has been in a generation, devaluing currencies around the world and unsettling the outlook for the global economy as it upends everything from the cost of a vacation abroad to the profitability of multinational companies.

The dollar lubricates the global economy. It is one side of about 90 per cent of all foreign exchange transactions, accounting for US$6 trillion (S$8.4 trillion) in activity every day before the pandemic, from tourists using their credit cards to companies making major international investments.

The main way to gauge the dollar’s strength is by indexing it against a basket of currencies of major trading partners like Japan and the euro zone. By that measure, the dollar is at a 20-year high, after gaining more than 10 per cent this year, a huge move for an index that typically shifts by tiny fractions each day.

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

In the past week, the yen sank to a 24-year low against the dollar, and the euro fell to parity, a one-for-one exchange rate, with the dollar for the first time since 2002. But pick just about any currency – the Colombian peso or the Indian rupee, the Polish zloty or the South African rand – and it has probably lost value against the dollar, especially over the past six months or so.

The factors roiling the global economy partly explain why the US dollar has suddenly become so much stronger.

As central bankers around the world try to tame inflation by raising interest rates, the Federal Reserve is moving more quickly and more aggressively than most. As a result, rates are now markedly higher in the United States than they are in many other large economies, luring investors attracted by the higher returns on even relatively conservative investments such as Treasury bonds. As money has poured in, the value of the dollar has increased.

Analysts at Bank of America estimated that more than half the rise in the dollar this year could be explained by the Fed’s comparatively aggressive policy alone.

The analysts cited its status as a haven in times of worsening economic conditions and stock market turmoil. They also said the dollar was rising because high energy prices were hitting the economies of importers, including most of Europe, harder than the US, which is less reliant on buying oil and gas from abroad.

“Not only are recessionary fears rising, but the US also looks better off than the rest of the world,” said BNP Paribas markets strategist Calvin Tse.

Companies based outside the US have seen their sales bolstered by the strong dollar. Burberry, the British luxury goods maker, said on Friday (July 15) that it would add more than US$200 million to its revenue this year because of movements in the currency – helping to offset a decline in sales in China, where the economy is slowing.

But American companies with large international operations are taking a hit when they convert foreign sales back into dollars. Profits at both Microsoft and Nike, for example, have recently eroded. Apple generates more than 60 per cent of its sales outside the US; it and other tech giants, which dominate many stock indexes, are likely to suffer from the dollar’s strength when they reveal their latest financial results in the coming weeks.

Many companies and governments abroad also borrow in US dollars, and the currency’s strength is a big problem. This is particularly true for poorer countries attracted to dollar-denominated debt as an alternative to less developed local markets.