- The value of the US dollar is at a 20-year high, recently reaching parity with the euro.
- It's a boon for American tourists, but poses challenges for some investors and businesses.
- While the strong dollar creates winners and losers, some believe it could help cool inflation.
With the value of the dollar at a 20-year high, it's a great time for Americans to travel abroad. But not everyone is celebrating.
The dollar recently reached parity — a one-to-one equivalence — with the euro for the first time since 2002. The ongoing shift in the exchange rate has been driven by the Federal Reserve raising interest rates — which has made investments held in dollars more attractive. Additionally, concerns about the state of the European economy — particularly Europe's exposure to the war in Ukraine and the energy crisis, have spooked investors. As they have directed their money to the US, the value of the dollar has risen.
For US corporations that have operations in other countries, a strong dollar makes their goods more expensive — and therefore less competitive in the European market.
When these corporations convert their foreign sales back into dollars, the strong dollar results in dampened profits. Per Credit Suisse, an 8% to 10% increase in the value of the dollar causes US company profits to fall by an average of 1%. Over the last 12 months, the dollar has gained 15% against the euro.
Generally, US companies generate roughly 30% of their profits from abroad. Ben Laidler, global markets strategist for eToro, told the New York Times he thinks the dollar's rise will cut the earnings of S&P 500 companies by a combined $100 billion this year.
When earnings fall, that tends to be bad news for the stock market — and firms with large international exposure could be impacted in particular. A Goldman Sachs report found that the shares of companies that generate the majority of their sales in the US have outperformed more global businesses by 9 percentage points in 2022 — though both groups are down for the year.
Microsoft, for instance —which generates approximately half of its profits from abroad — said foreign-exchange effects reduced its sales by $302 million last quarter and warned that the impact to sales and profits next quarter could be $460 million and $250 million respectively. Salesforce, AbbVie and Deere & Co. are among other corporations expecting the stronger dollar to hurt sales.
Technology companies, which have already experienced falling share prices and — in some cases layoffs — over the past months, could be disproportionately impacted by the currency movements. Many of these companies, like Microsoft, generate over half their sales from abroad. While these corporations can engage in forms of currency hedging to mitigate impacts of currency fluctuations, Microsoft's sales and profit projections suggest these companies will not be unscathed.
If the stronger dollar helps to bring down inflation, however, perhaps it will be a positive development for technology companies, many of whose stocks have responded poorly to the Federal Reserve's rate hikes over the past year. The strong dollar makes imports cheaper for US corporations, which in theory, could help ease the inflation gripping the economy. When Americans — whether they be tourists or online shoppers — direct their spending abroad, they're helping to ease the pricing pressures in their home country.
"The strong dollar is helping curb inflationary pressures," Rhea Thomas, senior economist with Wilmington Trust, told The Washington Post.
These currency movements have ramifications for other countries as well, particularly those with a lot of debt denominated in US dollars. A fall in the value of their currencies makes paying back their debt more difficult.
For European corporations, the stronger dollar has made US imports more expensive. The same goes for oil — which is priced in dollars — an unwelcome development given the energy shortage spanning the continent. That said, these corporations have benefitted from strong demand from US consumers and tourists. And just as converting sales from euros to dollars is hindering US corporations, it's helping to pad the bottom-lines of European multinationals.
The impacts of these currency fluctuations extend well beyond Europe, however. Over the past year, the dollar has also strengthened against the currencies of China, India, South Korea, Britain and Japan, among a multitude of others.
Indeed, the strong dollar has created winners and losers across the global economy. If, as some experts expect, the dollar strengthens even further, these impacts could be exacerbated.