So we’re all taking the Federal Reserve’s medicine, and boy does it taste awful. From the way the markets are behaving, one may think that the world’s largest companies are laying off workers, slashing prices, closing factories, and declaring imminent bankruptcy? But none of that is happening nation-wide…
Adding even further confusion, the U.S. dollar is more valuable today than it has been in two decades. For the first time, you can buy a Euro with a U.S. dollar on the currency markets, and nearly buy a British Pound. The U.S. Dollar Index, which measures the greenback’s ever-fluctuating value compared with a basket of big trading partners, is up +20%, good news for anyone buying imported products or planning a vacation abroad.
However, a muscular dollar also carries an economic price. Anything manufactured in the U.S. and exported abroad has become roughly 20% more expensive this year, making American companies less price-competitive with companies that produce locally or in countries with cheaper currencies. Conversely overseas countries that have debt denominated in dollars are finding it more expensive to make their interest payments. And, because most of the world’s commodities are priced in dollars, essentials like oil, wheat and soybeans are more expensive globally.
Will this trend continue? It could… Whenever the Fed raises interest rates, as it has several times in its efforts to cut domestic inflation, the dollar picks up more value. More rate hikes are expected, meaning an even stronger currency and cheaper international trips for Americans in the future.