Exports, Gold and Oil: How the Appreciated Dollar Impacts the US Economy

Few investments have increased in value during this challenging year on Wall Street. But one asset that is on the rise in 2022 is the US dollar.

The dollar has soared this year thanks to the Federal Reserve raising interest rates to fight inflation and expects the US economy to prove more resilient than others around the world despite fears of recession.

The US Dollar Index, which tracks the dollar against the pound sterling, euro, Swiss franc, Japanese yen, Canadian dollar and Swedish krona, is up nearly 13% this year and is trading near its lowest level. high since May 2002.

With the dollar so strong – at 20-year peaks – this is likely to hurt the profits of giant US multinationals. This is because the strong dollar reduces the value of sales and earnings from its operations abroad.

Components at Microsoft and Nike have noted the dollar’s strength as a problem in earnings calls over the past few months, for example.

“Currency volatility has accelerated and bullish valuations are at their peak for decades. History is not a good one for this type of scenario,” said Lisa Shalett, chief investment officer and head of global investment at Morgan Stanley Wealth Management, in a report on Monday.

“While the dollar helps the Fed fight inflation, it also threatens US corporate earnings through the conversion of foreign earnings and a deterioration in competitiveness,” added Lisa.

A strong dollar could lead to a further pullback in oil prices as oil (like other commodities) is traded in dollars. Lower energy costs would obviously be good news for consumers around the world who are struggling to make ends meet because of inflation.

But oil stocks are by far the best performing sector this year. So if energy prices continue to fall (oil prices are down nearly 5% last month), this could be bad news for the broader market.

“We want to believe that the rally [do dólar] cannot go on forever, because such a strong dollar is also a growing headache for the US itself,” Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, said in a report last week.

“The stronger dollar is expected to have a negative impact on US exports, making US goods less affordable for others, especially as the world is grappling with a sharp decline in purchasing power,” he added. “If the dollar continues to rise at this speed… the US economy will also hit a snag.”

The rising dollar also hurt gold, which has fallen about 6% this year, as well as bitcoin and other cryptocurrencies. Despite a recent rally for bitcoin to around $22,000, bitcoin prices have more than halved this year. Simply put, investors don’t need precious metals or cryptocurrencies as protection for the dollar at a time when the dollar is king.

There is a bright spot for the strong dollar. It gives American consumers more purchasing power, especially for imported goods, and a bigger budget for international travel.

“The benefits of a stronger dollar include a moderating influence on inflation here. And greater purchasing power for US businesses and consumers abroad,” said Tim Holland, chief investment officer at Orion Advisor Solutions, in a recent report.

Holland noted that the dollar and euro are roughly at par now. In 2008, just before the Great Recession and Global Financial Crisis, the euro hit a record high above $1.60, a move that helped contribute to oil prices soaring to nearly $150 a barrel.