What A Strong Dollar Means As Global Economic Worries Grow - The New York Times

7/19/22, 10:16 AM What a Strong Dollar Means as Global Economic Worries Grow - The New York Times
https://nyti.ms/3ckszXG
The Dollar Is Extremely Strong, Pushing Down the World

By Karl Russell, Joe Rennison and Jason Karaian July 16, 2022
The value of the U.S. dollar is the strongest it has been in a generation,
devaluing currencies around the world and unsettling the outlook for the
global economy as it upends everything from the cost of a vacation abroad
to the profitability of multinational companies.
How currencies have dropped against the dollar

DEC. 31, JULY 15,
0 2021 2022
Mexico
Nigeria
Vietnam
Canada
Singapore
–5%
Indonesia
China
South Africa
Australia
Switzerland
India
Colombia
Thailand
–10 Philippines
New Zealand
Czech Republic
Israel
South Korea
https://www.nytimes.com/interactive/2022/07/16/business/strong-dollar.html 1/9
Stronger Eurozone
Denmark
dollar Britain
Norway
Chile
–15 Sweden
Poland
Egypt
The percentage change to July 15 Japan
from Dec. 31 of each country’s
official currency versus the U.S. dollar.
Hungary
–20
Argentina
Turkey
–25
Source: FactSet
The dollar lubricates the global economy. It is one side of about 90 percent
of all foreign exchange transactions, accounting for $6 trillion in activity
every day before the pandemic, from tourists using their credit cards to
companies making major international investments.
As the world’s most important currency, the dollar often rises in times of
turmoil, in part because investors consider it to be relatively safe and
stable. The dollar has gained in recent months as inflation has soared,
interest rates have increased and the worries over growth have worsened.
“That’s a pretty tough mix,” said Kamakshya Trivedi, the co-head of a
market research group at Goldman Sachs.
The main way to gauge the dollar’s strength is by indexing it against a

basket of currencies of major trading partners like Japan and the
eurozone. By that measure, the dollar is at a 20-year high, after gaining
more than 10 percent this year, a huge move for an index that typically
shifts by tiny fractions each day.
110
105
U.S. dollar index
Monthly
100
95
90
85
80
Stronger
dollar
75
70
’02 ’05 ’10 ’15 ’20 ’22

Source: Refinitiv •
The index comprises the euro, Japanese yen, British pound, Canadian dollar, Swedish
krona and Swiss franc weighted against the U.S. dollar.
In the past week, the yen sank to a 24-year low against the dollar and the
euro fell to parity, a one-for-one exchange rate, with the dollar for the first
time since 2002. But pick just about any currency — the Colombian peso or
the Indian rupee, the Polish zloty or the South African rand — and it has
probably lost value against the dollar, especially over the past six months
or so.
The factors roiling the global economy partly explain why the dollar has
suddenly become so much stronger.
As central bankers around the world try to tame inflation by raising

interest rates, the Federal Reserve is moving more quickly and more
aggressively than most. As a result, rates are now markedly higher in the
United States than they are in many other large economies, luring
investors attracted by the higher returns on even relatively conservative
investments such as Treasury bonds. As money has poured in, the value of
the dollar has increased.
“It’s a very, very strong dollar,” said Mark Sobel, a former Treasury official
who now serves as the U.S. chair of the Official Monetary and Financial
Institutions Forum, a think tank. The currency has been stronger on only
three occasions since the 1960s.
Analysts at Bank of America estimated that more than half the rise in the
dollar this year could be explained by the Fed’s comparatively aggressive
policy alone.
The analysts cited its status as a haven in times of worsening economic

conditions and stock market turmoil. They also said the dollar was rising
because high energy prices were hitting the economies of importers,
including most of Europe, harder than the United States, which is less
reliant on buying oil and gas from abroad.
“Not only are recessionary fears rising but the U.S. also looks better off
than the rest of the world,” said Calvin Tse, a markets strategist at BNP
Paribas.
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While a stronger dollar can be a mixed blessing for people and companies,
such a sharp, quick move in the value of the world’s most widely used
currency can have a destabilizing effect of its own.
Americans traveling abroad this summer will find that their money goes
further. “One of the only ways an American can reap the rewards of a
strong dollar is by going on holiday,” said Max Gokhman, the chief
investment officer at AlphaTrAI, an asset management firm. “But even
then, the airfare is going to be much more expensive because of the rise in
oil prices.”
Companies based outside the United States have seen their sales bolstered
by the strong dollar. Burberry, the British luxury goods maker, said on
Friday that it would add more than $200 million to its revenue this year
because of movements in the currency — helping to offset a decline in
sales in China, where the economy is slowing.
But American companies with large international operations are taking a

hit when they convert foreign sales back into dollars. Profits at both
Microsoft and Nike, for example, have recently eroded. Apple generates
more than 60 percent of its sales outside the United States; it and other
tech giants, which dominate many stock indexes, are likely to suffer from
the dollar’s strength when they reveal their latest financial results in the
coming weeks.
Ben Laidler, global markets strategist at eToro, estimates that the rise in
the dollar will shave 5 percent off the earnings growth of S&P 500
companies this year, or roughly $100 billion. That’s a sizable impact given
that earnings among those companies are forecast to grow around 10
percent this year, according to FactSet.
Reflecting the drag, companies that generate most of their revenue in the
United States have performed better than rivals with more international
exposure, according to indexes compiled by S&P Dow Jones Indices.
+5%
Stock performance of
S&P 500 companies with
more exposure in:
0
–5
The United
–10 States
–15
Other
countries
–20
–25
Jan. Feb. March April May June July
Source: Refinitiv •
Data are the percentage change since Dec. 31, 2021, in the S&P 500 U.S. Revenue
Exposure Index and the S&P 500 Foreign Revenue Exposure Index, which comprise companies with higher-
or lower-than-average revenue gained either in the U.S. or foreign countries.
Many companies and governments abroad borrow in dollars, and the

currency’s strength is a big problem. This is particularly true for poorer
countries attracted to dollar-denominated debt as an alternative to less
developed local markets. As John B. Connally, a former Treasury
secretary, famously told his counterparts at a summit in the early 1970s,
“The dollar is our currency, but it’s your problem.”
Likely to be most affected are countries where dollar debt represents a

large portion of their gross domestic product. Paying interest to creditors
in dollars has become particularly difficult for countries with rapidly
depreciating currencies like Argentina and Turkey, especially as interest
rates on any new debt will also go up. In some cases, including for Sri
Lanka, it has become seemingly impossible.
The dollar, however, has not beaten every currency this year. The rise in
energy and food prices, which accelerated after Russia’s invasion of
Ukraine, has been a boon for the currencies of countries like Angola, a
major oil producer; Uruguay, a major food exporter; and Brazil, which
sells a lot of energy and agricultural commodities.
The Russian ruble, perhaps surprisingly, has been one of the best-
performing currencies against the dollar this year. High oil and gas prices,
as well as capital controls imposed by Russia to keep money inside the
country, have propped up the official exchange rate. What little ruble-
dollar exchanges that ordinary Russians are able to make are likely at a
weaker rate.
+30%
Angola
Russia
Weaker
dollar
+25
The percentage change to July 15

from Dec. 31 of each country’s official
currency versus the U.S. dollar.
+20
+15
+10
Uruguay
+5
Brazil
DEC. 31, JULY 12,

2021 2022
Source: FactSet
Can the buck be stopped? The U.S. economy is looking shakier, but as
Europe faces an energy crisis, Japan resists raising interest rates, China’s
Covid-19 lockdown policies snarl its supply chains and other countries
teeter under the weight of high inflation, demand for the dollar looks
robust. Though it remains unclear how long.
“For now, we still expect the dollar to trade on the front foot,” said Mr.
Trivedi of Goldman Sachs. “There might be a bit more to go, but probably
the largest part of the dollar move may well be behind us.”
The Bank of America analysts noted that they were “struck by our
investor conversations focusing on what could lead to a peak” in the
dollar’s value, “as opposed to what takes it another 10 percent stronger.”

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7/19/22, 10:16 AM What a Strong Dollar Means as Global Economic Worries Grow - The New York Times

The Dollar Is Extremely Strong, Pushing Down the World

How currencies have dropped against the dollar

The main way to gauge the dollar’s strength is by indexing it against a

’02 ’05 ’10 ’15 ’20 ’22

As central bankers around the world try to tame inflation by raising

The analysts cited its status as a haven in times of worsening economic

But American companies with large international operations are taking a

Many companies and governments abroad borrow in dollars, and the

Likely to be most affected are countries where dollar debt represents a

The percentage change to July 15

DEC. 31, JULY 12,

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