Economics Primers – US Dollar

strong dollar impact

  • dollar is attractive at both ends of the “dollar smile”
  • dollar is dominant reserve currency
  • 7 trillion reserves dollars held by 140+ countries as of 2022
  • dollar is stable – relied on for trade and transactions
  • there is always demand for dollars:
    • greed mode (this is the upturn portion of a smile)
      • economy is growing
      • investors bet on economic growth that leads to interest rate increases
    • fear mode (this is the downturn portion of a smile)
      • economy is struggling
      • investors flee to dollar as more secure asset

safe haven especially strong in 2022 because of uncertainty

  • supply chain issues
  • global inflation
  • energy crisis over ukraine war

prices

  • strong dollar means other currencies are weaker
    • it takes less dollars to purchase 1 unit of another country’s currency
  • those countries see
    • prices go up for goods and services
    • a stronger dollar “exports” inflation to emerging markets
  • in US, a strong dollar makes imported goods and travel abroad cheaper
    • US exports get more expensive for countries where the goods are exported to (less affordable)
    • sales of goods from exporting companies can go down, affecting the economy

40% of S&P revenue comes from exports

  • strong dollar can result in lower earnings
  • lower earnings can make stock prices fall

analysts see a strong dollar as the equivalent of an interest rate hike

  • companies slow down growth, reduce spending
  • can lower inflation

strong dollar is good until it isn’t (good up to a point)

dollar is main currency used in global trade

  • food and petroleum are priced in dollars when traded between many countries