The U.S. dollar has been surging so much that it’s nearly equal in value to the euro for the first time in 20 years. That trend, though, threatens to hurt American companies because their goods become more expensive for foreign buyers. If U.S. exports were to weaken as a result, so, too, would the already-slowing U.S. economy.
Yet there’s a positive side for Americans, too: A stronger buck provides modest relief from runaway inflation because the vast array of goods that are imported to the U.S. — from cars and computers to toys and medical equipment — become less expensive. A strengthened dollar also delivers bargains to American tourists sightseeing in Europe, from Amsterdam to Athens.
The U.S. Dollar Index, which measures the value of American money against six major foreign currencies, has jumped nearly 12% this year to a two-decade high. The euro is now worth just under $1.02.
The dollar is climbing mainly because the Federal Reserve is raising interest rates more aggressively than central banks in other countries are in its effort to cool the hottest U.S. inflation in four decades.
The Fed’s rate hikes cause yields on U.S. Treasurys to rise, which attracts investors seeking richer yields than they can get elsewhere in the world. This increased demand for dollar-denominated securities, in turn, boosts the dollar’s value.
Europe is in trouble
One of the newest and potentially devastating risks to the euro appears in the form of Russian gas. Russia has been delivering far less gas than requested by Germany, blaming this on the delays in getting equipment back from Canada due to sanctions on Russia.
Germany’s main gas pipeline, Nord Stream 1, is due to undergo routine maintenance From Monday the 11th of July to the 21st of July with some commentators highlighting this as an opportunity for Russia to politicize gas. Germany has already been placed on phase 2 of 3 of its emergency gas plan and could result in gas rationing if the issue persists.
Governments, markets and companies fear the shutdown might be extended due to war in Ukraine.
The other main economic event this week is Chinese second-quarter GDP data on Friday, with investors watching for signs of how hard the economy was hit by COVID-19 lockdowns.
Why is the euro falling?
The fall of the euro is linked to growing fears about the likelihood of a recession in the 19-nation eurozone.
Survey data has shown a slowing in business growth across the zone. Indicators suggest the region could slip into decline as the cost-of-living crisis tightens consumer demand.
According to survey data published on Tuesday from S&P Global's closely-followed monthly purchasing managers' index (PMI) — a marker of corporate confidence — dropped to 52.0 in June from 54.8 in May.
European Central Bank Vice President Luis de Guindos warned that the eurozone economy could face a recession if industry is forced to adjust to an energy shortage.
European gas prices peaked to their highest in four months amid supply concerns after a dip in flows from Russia. Strikes by Norwegian oil and gas workers have also exacerbated supply concerns.
The drop is also tied to a rise in the value of the US dollar as the Federal Reserve continues to raise interest rates in its fight against inflation. This is in contrast with the European Central Bank, which is planning more modest increases.
US will see trade deficit grow
The dollar’s rise is complicating an already uncertain outlook for the United States, the world’s biggest economy. On the one hand, the stronger greenback makes foreign goods less expensive for Americans and eases inflationary pressures. But not by much.
A sturdier currency takes a toll on U.S. companies that do business overseas. For one thing, it erodes the profits of multinational companies that rely on overseas sales.
The stronger dollar makes their foreign revenue worth less when they convert it to dollars and bring it home the United States. Microsoft, for example, last month downgraded the outlook for its April-June earnings “due to unfavorable foreign exchange rate movement.”
Worse, a stronger dollar makes U.S.-made products more expensive in overseas markets, while giving foreign products a price edge in the United States.
(with inputs from AP)
