You may have heard about the surging value of the U.S. Dollar on the international currency exchange markets. You might think that you maybe shouldn’t give this too much thought since you don’t travel overseas or love to buy American. However, this is not true. This is because the US dollar is the default international currency for trade and other transactions worldwide. Many countries, such as Saudi Arabia and China for example, fix their currencies to the Dollar. No matter what people say, oil and that iPhone produced in China are still priced and bought and sold in dollars.
Why is the U.S Dollar so strong?
Even with stock markets plunging and inflation at a 40 year high, the US dollar is surging to all time highs. The Euro is now below parity from the US Dollar for the first time in 20 years. Why is that so?
This is because of the Federal Reserve raising interest rates. Why is the Federal Reserve being forced to do so? This is because they want to bring down inflation which has reached a 40 year high as of September as quickly as possible. One can argue all day that excessive government spending, rising oil prices, supply chain issues, or a worker shortage has contributed to rising prices but the important point is that the Federal Reserve is aiming to put a stop to that through increasing interest rates, with a goal of 4-4.5% in the Fed Funds Rate (x) by 2023.
Because of this, the U.S. now offers temptingly high yields on their government bonds, causing money from the rest of the world to flow to these bonds, which means the rest of the world is forced to purchase US Dollars in order to get these high yield bonds. A 10-year Treasury note currently yields 4.25%. In the United Kingdom, however, a 10-year government note yields 4.05 percent. In Canada, 10 year bonds are currently yielding 3.64%.
With these information at hand, here are a few ways the booming Dollars affects your financial health.
1. Export and Tourism Industries Will Be Affected
You probably don’t care what the rest of the world pay for American apples or coal, but farmers and manufacturers in other countries will. The surging value of the dollar means that exports are more expensive than ever before and that usually means that U.S exports will have trouble competing against countries in foreign countries.
The stronger dollar also hurts tourism: Someone traveling from Canada will find food, accommodation and other travel costs higher in the U.S. than a year ago, and might consider vacationing at other locations instead.
Therefore, if you have a business related to manufacturing, agriculture, or international tourism, be prepared to experience a drop in business for now.
2. Imports and Travelling are now cheaper including food and electronics.
A stronger dollar means that U.S. importers, which includes consumers like you, can purchase goods at lower prices, which thankfully gives a helpful respite from rising inflation. A 1 percent rise in the value of the dollar lowers non-gas related goods prices by 0.3 percent, according to economists from the Federal Reserve Bank of Cleveland. Certain imported commodity prices have been falling, too: An estimated 80 percent of U.S. softwood lumber are imported from Canada, and lumber prices are back down to pre-pandemic levels.
As the dollar rises, you could get a much better deals on items like shoes and electronics, because an estimated 99 percent of all shoes sold in the U.S. are imported from other countries like China, according to the Footwear Distributors & Retailers of America. Similarly, many children’s toys, household items and electronics are made in China. This should be a welcome relief for consumers shopping for Christmas season as prices drop further.
Lastly, the further benefit of the rising dollar is that travelling abroad to other countries is now cheaper. The Euro is now worth less than a US Dollar so perhaps it will be a good idea to plan a trip to Europe soon.
3. Rising Dollar affects your 401k and Retirement.
If you already have hired a financial planner for your retirement, he or she has probably recommended that you diversify your investments into other foreign stocks as well. Perhaps you have investments in mutual funds that decide where to allocate your money, and it is likely that they have invested in foreign stocks alongside with American ones.
Unfortunately, it is time for your to worry about where your money is going. Although investing in foreign stocks and bonds does help diversify your holdings, this recent move in the U.S Dollar has meant that you would be losing more money than if you had just stuck with the US stock market, despite the recent downturn of the SnP 500.