The greenback was worth 0.92 British pounds on Wednesday, just shy of the all-time high of 0.93 pounds hit in 1985. A dollar bought 1.03 Euros that day, the most since 2001. The dollar was also the strongest against the Japanese Yen since 1998, and has been gaining against the Chinese Yuan, reaching its highest since 2008. In short, a dollar goes a lot farther in foreign countries than it did at the beginning of the year. While that may sound like a good thing if you’ve got dollars in your pocket—especially at a time when rampant inflation is eroding the value of money—it is very much a double-edged sword, and could help or hurt you depending on your situation. “It’s a very complex thing because the same person can be both hurt and helped by the strong dollar,” said Michael Klein, a professor of economics at Tufts University.
Why Is the Dollar Appreciating?
There are several reasons for the dollar’s recent rise, economists say. First, the Federal Reserve’s recent rate hikes have driven up yields on U.S. treasury bonds and made them a more attractive investment. Secondly, the U.S. economy, despite recession fears, has better prospects for economic growth than other parts of the world, and has been less damaged than Europe has by the war in Ukraine. As a result, foreign investment has flowed into the U.S. economy, which helps boost the dollar’s value.
Where a Strong Dollar Helps
The strong dollar drives down the cost of importing goods from foreign countries. Indeed, the price of imports fell 1% in August, according to data from the Bureau of Labor Statistics. That’s especially helpful for American consumers, who buy a massive amount of consumer goods manufactured abroad, especially from China. It also makes it cheaper for American companies that buy materials from overseas, which can help companies that rely heavily on imports, Klein said. A strong dollar is also a clear benefit to American tourists, who will find their dollars going much further abroad than in years past. The difference is especially stark in Britain, where dollars and pounds can now be traded at close to a one-to-one ratio. As recently as 2008, it took $2 to get 1 pound sterling. “It would be a good time to go visit Britain,” Klein said.
Where a Strong Dollar Hurts
On the flip side, the strong dollar will probably make the U.S. a less appealing destination for foreign travelers, and that will damage the U.S. tourism trade, and the hospitality business as a whole, Klein said. Similarly, U.S. companies that mostly export goods rather than import them will see the price of their products rise overseas, making them a harder sell. And while the effects of a strong dollar on the U.S. economy are mixed, they’re more firmly in the “bad” camp for developing countries, who face a double whammy of paying more to import commodities like oil, which are sold in dollars, and foreign debt becoming costlier to repay, according to a blog post by an economist at the World Bank. Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.
