The dollar has skyrocketed over the past 12 months, partly as the Federal Reserve boosted interest rates.
The dollar has been on fire over the past year, with the WSJ Dollar Index touching a 20-year high last week.
The greenback is benefiting from several factors. First, there’s the Federal Reserve’s interest-rate increases, which have made fixed-income investments more attractive in the U.S. compared with overseas.
The Fed has lifted rates by 1.5 percentage points since March, and experts expect it to go another 0.75 percentage point at its meeting next week. The one-year Treasury recently yielded 3.08%.
Also boosting the dollar: While many experts fear that a recession in the U.S. is coming, the economic outlook in much of the rest of the world is even worse. And many market participants expect the currency to continue to ascend.
The impact of a rising dollar is a mixed bag at the macro level. It makes commodities that are priced in dollars, such as oil, cheaper for the U.S. And the dollar’s strength makes imports cheaper, which can help companies that purchase goods overseas.
Investment Benefit
In addition, expectations that the dollar will keep ascending can attract foreign investors to the U.S. Even though they will pay more in their home currencies to buy dollar assets, if the dollar climbs further, those assets will be worth more in their home currencies.
On the downside, a strong dollar makes U.S. exports more expensive in foreign currency terms, discouraging foreigners from buying U.S. goods. And it means that when U.S. companies repatriate foreign-currency revenue from overseas, it will be worth less when converted into dollars.
Corporate stalwarts such as Microsoft (MSFT) – Get Microsoft Corporation Report and Nike (NKE) – Get Nike Inc. Report already have warned that the surging U.S. unit will weigh on their earnings.
Implications for Consumers
So what does the dollar’s jump mean for you?
On the plus side, if you travel overseas, your dollars will translate into more foreign currency. So you’ll have more buying power during your trip.
Also, U.S. consumers who buy an item that comes from overseas may benefit from the decrease in import prices.
The dollar’s strength could hurt you if you invest in mutual funds or exchange-traded funds that consist of foreign securities. That’s because those securities are now worth less in dollar terms. (Many foreign stock and bond funds hedge their currency exposure, so the value of those funds wouldn’t be affected by the dollar’s ascent.)
Some investors want exposure to foreign currencies to diversify their portfolios. And in the long run currency movements in foreign stock and bond funds are often a wash for these investors.
So choosing between a fund that hedges its currency risk or doesn’t do so is a strategic choice.
