Introduction

The Euro reached party against the US dollar for the second time in a few weeks and we wrote about it here. To put this in a statement, we can say the USD dollar has gained while the EUR has weakened over time.

This US dollar gain is something that has been ongoing for a number of years and we can see here that it has gained strength when compared with other currencies. The dollar index is a measure of the value of the US dollar, compared with a basket of foreign currencies.

What is the impact of a strong or weak US Dollar? Who benefits from a stronger dollar and is a strong dollar good for the economy?

In this article we examine how a stronger US Dollar impacts individuals, companies and countries as a whole.

Key Summary

Travelling Abroad

Not a phenomena that can be attributed to a strong dollar alone but it is relevant. More Americans with their increased purchasing power in US Dollars are likely to travel abroad because they get more value for their money.

Aside from any other mitigating factors such as travel bans or anything else that can restrict travel (monkeypox and all the different flavours of Covid), relevant airlines, cruise lines and other travel/hospitality related industries can see an uplift in US passengers.

Companies and Exports

US multinational companies selling their products abroad are negatively impacted by a strong dollar because the customers purchasing these products are doing so with a weaker currency.

Companies in countries that sell their products abroad i.e export their products, can benefit from a having a ‘weaker’ currency because it makes their products cheaper to acquire.

US companies such as MacDonalds or any other US companies that make a large number of their sales abroad are negatively impacted by a strong dollar. The profits made by MacDonalds in countries that use the Euro as their currency are not as strong as those made in the US since the EUR is weaker compared to the US Dollar.

Some people and businesses may choose not to purchase US products due to a stronger US dollar and if that happens it can lead to trade wars and other potential conflict.

Some companies in this position can hedge their currency exposure so they are not negatively impacted by the strength of the US Dollar versus the Euro – or any other currency as a comparison.

Conversely, domestic US companies such as local airlines or companies whose sales are solely derived from the US customers benefit from a stronger US Dollar.

Cheaper Imports

A stronger US Dollar means it is cheaper for US customers and companies to import products from the countries (especially China) since the purchasing power of the US Dollar is stronger than the local currency.

Domestic US companies can see a further boost to their sales and profits if they import raw materials and other services in US Dollar, and have their sales in the United States. CVS and Dollar General are examples of companies that can benefit from this.

Cheaper imports off the back of a stronger dollar can lead to or cause more inflation because as more people purchase items with their new found purchasing power, it increases demand and in turn, inflation.

To an extent the inflation we have seen in the US can be attributed to a stronger dollar, due to increased customer demand and increase in the price of goods.

In a situation like this, raising interest rates can help tackle rising inflation because higher interest rates encourages more people to save rather than spend.

Emerging Market Debt

A stronger dollar has an adverse impact on emerging economies for a number of reasons.

Emerging market debt is denominated in dollars so paying off that debt with a weaker currency when compared with the dollar means the debt is more difficult to pay.

Any companies in emerging economies that purchase raw materials or commodities in US Dollars also struggle with a stronger dollar because of the increased cost when it comes to purchasing these items. So the cost of business increases.

It also means money that would be otherwise be spent improving infrastructure or improving public searches, is spent servicing the debt. This has an effect on the economy and the people because money has to come from somewhere for the government to spend.

Printing money is not a feasible option because it can lead to more inflation. Emerging market bonds are negatively impacted by a strong US Dollar for this reason too.

Capital Flight: The Search for better Opportunities

Leading on from the previous point, when the economic prospects for a country are not good, capital flight begins. Foreign and local investors will look for a safe(r) haven for their money and those who can have the means will leave the country for better opportunities elsewhere.

Sri Lanka is an example of this and a strong US Dollar is one factor among others. The government was not getting as much revenue from tourism due to Covid and as the tourists stopped coming, so did the US Dollars they brought with them. This meant there were fewer dollars to convert to Rupees.

The lack of dollars meant the government was unable to make payments in dollars which is what their debt is denominated in and this vicious cycles continued. As the dollar strengthened, and the local currency weakened the interest on the debt increased meaning the Sri Lankan government and people have an increasing amount of debt to pay back.

Economic Growth Prospects

Further economic growth prospects are bleak since more money needs to be borrowed (new debt) to pay off the existing debt and the absence of a feasible economic recovery plan means fewer lenders are willing to come forth because the borrower is likely to default again (looking at you Argentina).

A prolonged impact of a strong US Dollar on emerging economies means there is a lesser pool of talent as younger people and those who have the means seek better opportunities elsewhere.

Those who remain or the elderly have meagre earnings and not enough purchasing power and we are likely to see the government struggle to pay its bills or invest.

It is important to note not all economic woes are caused by a strong US Dollar because there are many other factors to consider and there are things governments can do to reduce the impact of the blow.

Summary

The US Dollar is the world reserve currency and it means a number of things. This video describes in good detail the impact of this.

Currencies are traded in pairs so it more accurate to depict one currency weak or strong when compared with another currency.

The US Dollar has gained in strength when compared with other currencies and this has a material impact on the economy and the decisions people will make.

Individuals may see this as an opportunity to travel, companies in the US may use this opportunity to purchase Euro assets (in this example) because of the stronger buying power of the US Dollar.

Emerging economies are hit hard because of debt repayment and limited funds to invest in infrastructure or any other needs in the country. Younger and more able people may decide to leave further casting a shadow on the economic prospects for the country.