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Why a strong dollar leaves the US economy at a crossroads

Wall Street investors are bracing themselves for yet another volatile swing in stock markets: the rise of the US dollar.

The dollar — which is not only the dominant global currency but also “the main variable affecting global economic conditions,” according to the New York Federal Reserve (Fed) — reached a 20-year high last year after that the Fed aggressively raised rates.

Since then, inflation appears to have eased, putting downward pressure on the dollar. But in recent weeks, as a slew of economic data has shown the Fed’s battle with inflation is far from over, the currency is up about 4% from recent lows and is now close to a seven-week high.

Investors are stressed by this sudden recovery, as a stronger dollar means that US-made goods become more expensive for foreign buyers, overseas income declines in value and global trade weakens.

Multinational companies, naturally, are not thrilled about any of this. And about 30% of revenue for all S&P 500 companies is earned in markets outside the United States, said Quincy Krosby, chief global strategist at LPL Financial.

What is happening: the US dollar “finds itself again at a significant crossroads,” Krosby said. “While the Fed remains firmly dependent on data, the dollar’s course also remains focused on inflation and the Fed’s monetary response.”

“The strong US dollar has been a drag on international earnings and stock performance (for US investors),” Wells Fargo analysts wrote in a recent note.

February was a tough month for markets: the Dow ended February down 4.19%, the S&P 500 was down 2.6% and the Nasdaq lost just over 1%.

What comes next: Investors are clearly focused on the Fed’s upcoming policy meeting for signs about the direction of rates. But until then, investors can get some insight on Tuesday when Fed Chairman Jerome Powell speaks before the Senate Banking Committee.

They will also be watching next Friday’s jobs report for any slowdown in the job market that could dampen the Fed’s hike mood.

Don’t forget the debt ceiling: Another significant threat to the dollar is looming in Congress – the ongoing debt ceiling fight. The United States could start defaulting on its financial obligations during the summer or early fall if lawmakers don’t agree to raise the debt limit — its self-imposed borrowing limit — before then, according to a new analysis by the Center for Bipartisan Politics.

This could potentially lead to a disastrous downgrade of the United States’ credit rating and could send the dollar soaring as investors start selling their US assets and moving their money into safer currencies.

“This would certainly undermine the dollar’s role as the reserve currency used in transactions around the world. And Americans – a lot of people – would lose their jobs and certainly their borrowing costs would rise,” Treasury Secretary Janet Yellen told the CNN in January.

Source: CNN Brasil

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