The U.S. dollar is getting stronger amid a global battle with high inflation.<\/p>\n\n\n\n
Americans are getting less bang for their buck at home, but a stronger dollar makes foreign goods more affordable and international travel relatively cheaper. <\/p>\n\n\n\n
The dollar broke even with the euro for the first time in 20 years last week, and the dollar\u2019s value has climbed against a slew of other global currencies as the U.S. economy runs ahead of the rest of the world. <\/p>\n\n\n\n
Higher U.S. interest rates set by the Federal Reserve have also made the dollar more valuable to hold compared to other currencies, prompting demand for dollars from abroad.<\/p>\n\n\n\n
But the short-term benefits for many consumers also come with longer-term threats of lower corporate profits, fewer U.S. exports and a global economic slowdown that could bounce back to the United States.<\/p>\n\n\n\n
Here\u2019s what the dollar\u2019s power means for Americans.<\/p>\n\n\n\n
Cheaper imports, foreign travel<\/strong><\/p>\n\n\n\n The dollar\u2019s value has caught up with the euro, making it much cheaper for Americans to purchase goods from and travel through Europe in the middle of a steep rebound in summer vacationing. <\/p>\n\n\n\n The euro has typically traded above the dollar, but its recent decline gives Americans greater purchasing power abroad, even with high inflation.<\/p>\n\n\n\n \u201cA stronger dollar and a weaker Euro means that it\u2019s much cheaper to buy anything from Europe, and that could be either importing a car or it could mean going on vacation somewhere in Europe,\u201d said Stephen Miran, co-founder of investment firm Amberwave Partners and former Treasury Department adviser, in a Friday interview.<\/p>\n\n\n\n A stronger dollar also means foreign manufacturers can afford to charge less for their goods in the U.S., knowing they\u2019ll be paid back in a more valuable currency. Still, more purchasing power will do little to help bring down prices for products in short supply due to the war in Ukraine or pandemic-related snarls.<\/p>\n\n\n\n \u201cThat doesn\u2019t really matter if the supply of that product is zero because the supply chains are all messed up,\u201d Miran said.<\/p>\n\n\n\n Slowing exports and corporate profits<\/strong><\/p>\n\n\n\n A strong dollar makes foreign goods and services relatively less expensive compared to U.S. products. While that may give American consumers some relief at the cash register, it is a blow for manufacturers already struggling with supply chain snarls and material shortages.<\/p>\n\n\n\n \u201cWhen the dollar appreciates, the cost of foreign goods goes down, which makes it cheaper to import stuff. Now in normal times, we don\u2019t really like that because it makes the U.S. less competitive, so it tends to be less good for American industry. But these are not normal times,\u201d Miran said. <\/p>\n\n\n\n American companies with significant business overseas may also see their profits fall as their products become comparably more expensive in foreign markets. The stock market has already taken a serious hit from a combination of slowing earnings and higher interest rates. <\/p>\n\n\n\n Technology companies, in particular, are facing tough choices about layoffs, but any company highly dependent on foreign profits may face similar pressures.<\/p>\n\n\n\n Lower inflation, but at a potentially steep cost<\/strong><\/p>\n\n\n\n Cheaper imports and higher interest rates driven by a strong dollar should help bring down soaring inflation in the U.S. <\/p>\n\n\n\n The most recent data released by the Labor Department showed prices rose 9.1 percent over the past 12 months. <\/p>\n\n\n\n Prices for imported goods may soon begin to plateau or even drop as foreign manufacturers reap the benefits of being paid in stronger dollars. That could give Americans some breathing room and bring monthly inflation figures down amid struggles with oil, food and commodity price shocks driven by the war in Ukraine.<\/p>\n\n\n\n A strong dollar also reinforces the Fed\u2019s efforts to boost interest rates high enough to slow the economy into lower inflation. <\/p>\n\n\n\n Demand rises for U.S. Treasury bonds when the dollar gets stronger, which pushes interest rates on those bonds higher.<\/p>\n\n\n\n \u201cThe Fed\u2019s pressure on the bond market is really what is driving the strong dollar. They\u2019ve made U.S. bonds so attractive relative to non-U.S. sovereign bonds, people are buying them hand over fist,\u201d said Daniel Alpert, managing partner at investment firm Westwood Capital.<\/p>\n\n\n\n Interest rates on trillions of dollars in debt across the world will also rise with Treasury bond rates.<\/p>\n\n\n\n Businesses and financial institutions often set interest rates on loans based on Treasury bond rates, so a strong dollar boosts the global baseline for borrowing costs.<\/p>\n\n\n\n As foreign nations and businesses face higher debt costs, it could slow their economies enough to cause severe hardship as they struggle to recover from the COVID-19 pandemic.<\/p>\n\n\n\n \u201cWhenever the value of the dollar appreciates, these countries therefore need to mobilize more resources in terms of local currency to service their debt and pay for their imports,\u201d said Daouda Sembene, a nonresident fellow at the Center for Global Development and a former executive director at the International Monetary Fund, in a Tuesday email.<\/p>\n\n\n\n \u201cUltimately, this could aggravate risks of food insecurity, which is a key challenge in many developing countries.\u201d<\/p>\n\n\n\n The stronger dollar\u2019s impact abroad could come back to hurt the U.S. as well, particularly if deep turmoil in the developing world also comes with a steep decline in Europe\u2019s economic activity. <\/p>\n\n\n\n That could take a toll on U.S. companies and businesses depending on foreign tourism. \u201cSlower growth abroad can still come back over into the U.S.,\u201d Miran said.<\/p>\n\n\n\n