Strong Dollar: An Overview
A strong U.S. dollar offers both benefits and drawbacks. Some individuals profit from it, but others lose out. When the dollar appreciates versus other currencies in the foreign exchange market, it is said to be strong. A stronger U.S. dollar makes it possible to purchase more foreign currencies than previously. For instance, a strong dollar helps Americans who go abroad but disadvantages international visitors to the United States.
By year’s end, the Invesco DB U.S. Dollar Index Bullish Fund (UUP) had increased by about 4% for the year. A basket of significant international currencies, such as the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc are included in this exchange-traded fund’s index, which measures the value of the dollar in relation to those rates.
Advantages of a Strong Dollar
Traveling Abroad Is Cheaper
American citizens with U.S. dollars have more purchasing power abroad since those dollars can go farther. A strong dollar can buy more items when converted to the local currency since changes in U.S. economic conditions have little impact on local prices in other nations.
If expatriates still possess dollars or get dollars as income, their cost of living will likewise decline. Expatriates are American citizens who live and work abroad.
Imports Cost Less
If the value of the currency used by the manufacturer declines relative to the dollar, goods manufactured overseas and imported into the US will be less expensive.The value of expensive European cars like Audi, Mercedes, BMW, Porsche, and Ferrari would all decrease. A premium automobile from Europe that costs €70,000 will cost $94,500 at the current exchange rate of 1.35 dollars to the euro. If the exchange rate drops to 1.12 dollars for every euro, the identical automobile that was previously selling for the same amount of euros would now cost $78,400.
Import costs will continue to decrease as long as the dollar remains strong. The price of other low-cost imports will also decrease, giving American consumers more discretionary cash. Companies in the United States that import their raw materials will have reduced overall manufacturing costs and higher profit margins as a consequence.
Benefits of International Business in the United States
Investors and foreign businesses with significant U.S. business will profit. Increases in the value of the dollar will be reflected on the financial accounts of international companies with significant U.S. sales and earnings. These firms’ investors ought to receive compensation as well.
Bolstered Status as a World Reserve Currency
The dollar’s status as the world’s reserve currency is supported by its strength. Even while several countries, like China, Iran, and Russia, have questioned the U.S. dollar’s status as the de facto global reserve currency, a strong dollar helps to keep reserves’ demand for it high.
Disadvantages of a Strong Dollar
Traveling to the United States Costs More
With a higher dollar, foreign visitors will discover that American products and services are more expensive. Business travelers and foreigners who live in the US but maintain bank accounts in their native currencies or get paychecks in those currencies will suffer, and their cost of living will rise.
Exporters Suffer
Domestically manufactured items are comparatively more expensive overseas, just as imports are less expensive at home. With a dollar to euro exchange rate of 1.35, a $30,000 American-made automobile would cost €22,222 in Europe; nevertheless, when the dollar strengthens to 1.12, it rises to €26,786. Some have suggested that pricey exports may result in the loss of American employment.
US Businesses Operating Abroad Are Hurt
Companies with U.S. headquarters that conduct a sizable amount of business abroad will suffer because their balance sheets will show a decline in the value of the income they bring in from overseas sales. Investors in these companies are likely to suffer as well.
Philip Morris International Inc. (PM) and McDonald’s Corp. (MCD) are well-known examples of US businesses having a sizable portion of their sales coming from abroad. Although some of these businesses employ derivatives to protect themselves against currency risks, others may only do so partially.
The Impact on Emerging Market Economies Is Negative
Foreign nations that need US dollar reserves will ultimately pay a disproportionately higher price for those currencies. Particularly in emerging market economies, this is crucial.
Special Considerations
According to economic theory, currency swings will ultimately return to the mean since the desire for cheap imports should cause their prices to rise. As the demand for these goods drops globally, pricey local exports will also have to decrease in price until, at some point, an equilibrium exchange rate is achieved.
