US Dollar Rallies, But It’s Not All Good News

The US dollar is gaining strength at a rapid rate, achieving its strongest level against other major currencies in almost 20 years.

The US dollar Index has jumped 4% in the past month and nearly 13% year-to-date, while other important currencies have flagged.

The euro has dropped 12% this year. On Tuesday, it achieved parity with the US dollar for the first time in two decades, forcing investors to dump their holdings. The British pound has slipped toward levels last seen during the worst days of the pandemic.

The dollar's recent climb began when investors started to park money in the US, buoyed by the Federal Reserve’s assertive interest-rate hiking program. 

In recent weeks, the dollar has grown in strength as more investors look to the US as a safe haven, especially with widespread fears of a global recession brewing.

Other traditionally safe currencies are missing out on the action thus far. The Swiss franc has softened by 8% this year. The Japanese yen has been volatile and recently hit its weakest level against the dollar since 1998.

What does this mean for me? 

A stronger dollar gives Americans more spending power when they are travelling outside their country. However, a strong dollar is not good news for US companies abroad as their earnings fall based on a strong dollar.

With US firms already dealing with the effects of high inflation, supply chain snags, and the burden of managing high inventory, reduced dollar earnings is unwelcome news.