Strongest US dollar in 20 years, bad for some businesses and investors

  • The value of the US dollar is at its highest level in 20 years, recently reaching parity with the euro.
  • It’s a boon for American tourists, but poses challenges for some investors and businesses.
  • While the strong dollar creates winners and losers, some believe it could help calm inflation.

With the value of the dollar at its highest level in 20 years, now is the perfect time for Americans to travel abroad. But not everyone celebrates.

The dollar recently reached parity — a one-to-one equivalence — with the euro for the first time since 2002. The continuous evolution of the exchange rate has been leads by the Federal Reserve raising interest rates — which made investments held in dollars more attractive. Additionally, concerns about the state of the European economy, particularly Europe’s exposure to the war in Ukraine and the energy crisis, spooked investors. As they directed their money to the United States, the value of the dollar rose.

For American companies with operations in other countries, a strong dollar makes their products more expensive – and therefore less competitive in the European market.

When these companies convert their overseas sales into dollars, the strong dollar leads to lower profits. According to Credit Suisse, a 8% to 10% the increase in the value of the dollar causes the profits of American companies to fall by 1% on average. Over the past 12 months, the dollar has gained 15% against the euro.

Typically, U.S. companies generate about 30% of their profits from abroad. Ben Laidler, Global Markets Strategist for eToro, Told the New York Times, he thinks the rising dollar will cut S&P 500 company earnings by a combined $100 billion this year.

When incomes fall, it tends to be bad news for the stock market – and companies with strong international exposure could be particularly affected. A Goldman Sachs report found that the stocks of companies that generate the majority of their sales in the United States outperformed more global companies in 9 percentage points in 2022 – although both groups are down for the year.

Microsoft, for example, which generates about half of its overseas earnings – said currency effects reduced its sales by $302 million in the last quarter and warned that the impact on next quarter sales and earnings could be $460 million and $250 million respectively. Salesforce, AbbVie and Deere & Co. are among other companies expecting the stronger dollar to hurt sales.

Technology companies, which have already experienced the fall share the prices and — in some cases layoffs — in recent months, could be disproportionately affected by currency fluctuations. Many of these companies, such as Microsoft, generate more than half their sales from abroad. Although these companies may engage in forms of currency hedging to mitigate the impacts of currency fluctuations, Microsoft’s sales and earnings projections suggest that these companies will not be unscathed.

However, if the stronger dollar helps lower inflation, it may be a positive development for tech companies, many of whose stocks have reacted badly to the

Federal Reserve

it is rate hikes over the past year. The strong dollar makes matter cheaper for U.S. businesses, which in theory could help dampen the inflation gripping the economy. When Americans, whether tourists or online shoppers, direct their spending overseas, they are portion to alleviate price pressures in their country of origin.

“The strong dollar is helping to dampen inflationary pressures,” said Rhea Thomas, senior economist at Wilmington Trust, Told The Washington Post.

These currency movements also have ramifications for other countries, especially those with a lot of debt denominated in US dollars. A fall in the value of their currency makes it more difficult to repay their debt.

For European companies, the stronger dollar has made US imports more expensive. The same goes for oil, which is dear in dollars — an unwelcome development given energy shortage spreading over the continent. That said, these companies have benefited from strong demand from American consumers and tourists. And just as the conversion of sales from euros to dollars hurts American companies, it helps to inflate the results of European multinationals.

The impacts of these currency fluctuations, however, extend far beyond Europe. Over the past year, the dollar has also strengthened against the currencies of China, India, South Korea, Britain and Japan, among others. multitude others.

Indeed, the strong dollar has created winners and losers throughout the global economy. If, as some experts expectthe dollar strengthens further, these impacts could be exacerbated.

Robert D. Coleman