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Forex in this article
• Dollar worth more than euro at times
• Dollar strength does not only have advantages
• World economy and US export economy with problems
For years, the euro was worth more than the US dollar. In the midst of the financial crisis in 2008, the EUR/USD exchange rate peaked at 1:1.60. But the picture has changed for a few months: the dollar has appreciated significantly against the euro.
Euro weakness instead of dollar strength
There are many reasons why the US currency is catching up. The US economy is in a more resilient state than that of the euro zone, fueled not least by the war in Ukraine, which has plunged Europe into a gas crisis, among other things. The United States is far less dependent on Russian oil and gas and therefore less affected by the massive rise in oil and gas prices.
High rates of inflation are also having a negative impact overseas, but the country’s currency watchdogs reacted much earlier and initiated a turnaround in interest rates months ago. Meanwhile, the European Central Bank initially wanted to sit out the inflation crisis and for a long time described the sharp rise in consumer prices as a temporary phenomenon. This had drastic consequences on the financial market: after the rise in key interest rates in the USA, US government bonds became significantly more attractive compared to government bonds from the euro zone – many investors therefore shifted their investments and took US dollars in their hands to deal with US to cover bonds. This provided additional support for the greenback and was one of the reasons why parity was fallen several times in the past few weeks and the dollar cost more than its European counterpart.
This is initially good news for US consumers, because the strong dollar means higher purchasing power. Imported goods are becoming cheaper, and the American population is getting more for their money. The strong US dollar is having a positive impact on the country’s population, especially when it comes to imported goods such as vehicles, electronic items or textiles. And a holiday in Europe is also worthwhile for Americans more than it has been for years – although prices in the euro zone have risen significantly due to inflation, the strong dollar ensures that Americans can find bargain prices in Euroland.
In addition, US export goods such as oil and gas that are currently in high demand are traded in US dollars on the world markets – this strengthens the dollar and drives up the prices for the coveted raw materials.
However, the US dollar is not only the means of payment in the United States, but also has an important position in the international financial and economic structure. However, the revalued greenback is not only having a positive effect here.
Domestic export economy suffers
For companies that have a strong focus on exports, the current developments on the foreign exchange market are a heavy burden. The strong dollar is increasingly becoming a threat to their balance sheets, particularly for companies with a strong focus on exports that sell their goods internationally. For example, the software giant Microsoft had to correct its forecast for the fourth business quarter downwards, and IBM also recently warned of the consequences of the dollar’s strength for its own business. Tech giant Apple has recently responded by significantly raising the prices of its new iPhone 14 for many markets outside the US. Only in China and on the domestic market did the price level remain untouched. With the sometimes juicy price increases, the company wants to compensate for falling dollar base income in Europe, but also risks a decline in demand for Apple products in the euro currency zone.
World economy in turmoil
The strong dollar is also a negative factor for the global economic structure, making work more difficult for central banks in particular. “A stronger dollar makes it very difficult to fight inflation in Europe for a number of reasons,” the Wall Street Journal quoted Keith DeCarlucci, chief investment officer of London-based hedge fund Melqart KEAL Capital. “The main commodities they trade, including energy, are priced in dollars,” the expert continued. In view of these conditions, the monetary authorities are walking a fine line: if they raise interest rates too quickly and aggressively, they risk a recession.
And the strong greenback also harbors enormous risks for emerging countries, because their debt burden with investors is often settled in US dollars, which in turn weakens the national currencies and fuels inflation in the country. Corresponding developments had already taken place in the 1980s and 1990s, when Asian and Latin American countries suffered from the strong dollar and had problems servicing their debts in the face of weak national currencies in US dollars.
In the worst case, countries could be forced to make currency interventions and sell their dollar reserves to acquire domestic foreign exchange.
US government observes the strong US dollar
In view of the burdens on the US export economy, especially in the IT and consumer goods segment, incumbent US President Joe Biden is likely to watch the growing dollar strength with eagle eyes. Unlike his predecessor donald trumpwho emphasized “The strong dollar is killing us”, especially with regard to the US current account deficit, the current incumbent has not yet officially expressed concern, but the developments on the foreign exchange market are likely to have been discussed in the White House as well.
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