FRANKFURT (Reuters) – American is everything to everyone, with fingerprints in every corner of the global economy: the currency that buys and sells critical raw materials and a safe haven for investors in times of turmoil.
The greenback is now at 20-year highs against other major currencies, thanks to expectations that the Federal Reserve will raise interest rates faster than other currencies.
Here are 10 reasons why you should pay attention:
Americans Abroad – A stronger dollar is better if you’re an American tourist. Hotels, food and luxury bags are all cheap compared to London, the French Riviera or Cancun. Needless to say, the opposite is true for U.S.-bound travelers — if they don’t buy tickets to Disney (NYSE:)land or flights to Las Vegas long in advance, it will cost them more.
Delight equals value – an added boon for Americans visiting one of the 19 countries that use the euro and a small consolation for European tourists in the US. Converting between dollars requires no more math – you can now treat it as a matter of course.
Made in America – For shoppers around the world looking for the best American brands, a strong dollar means local distributors will have to pay a premium unless they try to mitigate the impact of the currency. In the past few days, U.S. companies such as Mattel (NASDAQ: ), maker of the Barbie doll and toy car (Hot Wheels), have said they have been hurt by the dollar’s strength, even as customers appear willing to pay higher prices. For consumer goods giant Procter & Gamble — maker of consumer products like diapers and Ariel laundry powder — a rising dollar almost always has a similar effect on its sales.
An emerging problem – For Argentina, the dollar’s appreciation against the peso doubled domestic prices in a year and led to a mounting economic crisis. Governments and corporations in many emerging economies finance themselves by issuing bonds denominated in US dollars. Now payables have increased in value when measured in their local currency. Increasing interest rates in the United States are also making the market’s way of borrowing more expensive.
Raw materials – Countries like Egypt import most of their raw materials. Most commodities, from oil to wheat, are priced in US dollars, meaning they pay more in local currencies for every barrel or bushel they buy. This comes at a time when prices of these commodities have already reached their highest levels in several years due to the war in Ukraine, drastic changes in weather conditions and the effects of the Covid pandemic.
Supporting families – A rising dollar is good news for residents of poor countries like Mexico and Guatemala who rely on remittances from relatives working in the United States. The fallout from Covid-19 in 2020 was a major blow to these remittances, but they have seen a steady recovery since then.
Inflation – Even for wealthy countries like Germany, a rising dollar can cause problems, as it contributes to already high inflation through expensive imports. Domestic central banks typically respond by raising interest rates, which makes credit more expensive and slows economic growth.
The rise in the ruble — the world’s only currency to make modest gains against the dollar this year — was the unintended consequence of a country under international sanctions over its aggression against Ukraine. But this power — a somewhat artificial effect of foreign exchange controls — is of little use to ordinary Russians. Moscow may earn tens of billions of dollars each month from energy sales to the West, but Russian households still cannot withdraw their foreign exchange savings. Many Western brands, from Adidas ( ETR: ) to H&M and Ikea, have stopped selling their products in Russia since the start of the war.
Cryptocurrency Bitcoin – marketed as the last shield against inflation, but the world’s biggest digital currency has fallen short of its promise and has lost more than half its value this year despite runaway consumer prices in large parts of the world. Crowds of retail investors, lured by last year’s market rally, ditched it and shifted their savings to what they saw as the safest US currency.
Dollar Strength – Taking the price of a burger as an example, the dollar is actually very strong and likely to fall. The Economist’s Big Mac Index, which compares the price of burgers around the world, shows the U.S. currency is overvalued against all but a handful of currencies. The dollar is the most expensive — and the Big Mac is the cheapest for American travelers — in Venezuela, Romania and Indonesia. The opposite is true in Switzerland, Norway and Uruguay.
(Prepared by Rehab Ala for Arabic Newsletter – Edited by Wajdi Al-Alfi)
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