The fallout from a strong dollar
The dollar has been on a roll this year and recently hit a record high against the Japanese yen, before the yen’s rebound on Monday. The U.S. Dollar Index (sometimes called the “Dixie”), which measures the dollar against a basket of five big economy currencies, is up about 5% since January.
A strong greenback can have a bunch of consequences, from making our exports more expensive to foreign buyers to potentially unsettling global markets. But what exactly does a strong dollar mean?
“Currencies are basically a measure of whose economy is doing better. And the U.S. economy is doing better than pretty much everyone else,” said Jonas Goltermann, deputy chief markets economist at Capital Economics.
That’s because the U.S. economy is strong, the Federal Reserve has kept interest rates high to fight inflation, and “when U.S. interest rates are high, it makes dollar assets attractive — especially bonds and bank deposits in the U.S. that pay interest,” said Joseph Gagnon of the Peterson Institute for International Economics.
But that can also hurt other economies, noted Goltermann. “It tends to pull a lot of other currencies down — not just the Asian currencies, but other emerging markets. And that can generate uncertainty and volatility.”
Here in the U.S., a stronger dollar makes our exports more expensive for foreign buyers and may hurt domestic manufacturers. It makes imported goods cheaper, so we can buy a bit more stuff.
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