A Strong Dollar Is Great News For America’s Consumers—But Not So Much For its Businesses

The U.S. dollar is up 13 percent this year against major foreign currencies. That's great news to American shoppers in Europe and Asia, but spells trouble U.S. multinational companies like Boeing that rely on overseas sales.

A strong U.S. dollar turns out to be a boon for luxury shops in Europe. Gamma-Rapho via Getty Images

Economics 101 tells us that when a country’s inflation rises, the value of its currency tends to drop. However, that’s far from the case with the U.S. dollar. Despite scorching inflation in recent months, the dollar has appreciated significantly against major foreign currencies including the British pound, the euro and Japanese yen.

Sign Up For Our Daily Newsletter

By clicking submit, you agree to our <a rel="noreferrer" href="http://observermedia.com/terms">terms of service</a> and acknowledge we may use your information to send you emails, product samples, and promotions on this website and other properties. You can opt out anytime.

See all of our newsletters

On July 14, the dollar and the euro reached parity for the first time in 20 years. The exchange rate provides a rare boon for American travelers in Europe but spells warning for major U.S. exporters, such as Boeing, and multinational corporations that generate overseas revenues in foreign currencies.

The U.S. dollar index, which measures the value of the dollar relative to a basket of foreign currencies, is up 13 percent this year. That means a default discount for consumers who buy things with dollar in many countries.

In Paris, American tourists have embarked on shopping sprees at luxury stores, and many at home are planning shopping trips to Europe, according to Reuters and the Wall Street Journal. Reuters reported tourism spending in Europe jumped 400 percent in June from a year ago, when the pandemic depressed travel

But for businesses, a rising dollar means their products are getting more expensive to foreign buyers and their overseas revenue loses value when converted from local currencies to the greenback.

Boeing, the largest exporter in the U.S., recently lost a huge order of nearly 300 commercial jets purchased by the Chinese government, to Europe-based Airbus. China has historically split jet purchases evenly between Europe and the U.S., but the balance has begun to tilt. This year so far, Boeing has delivered only one commercial jet to China, while Airbus has delivered 47. Neither China nor Boeing nor China cited exchange rates as a factor in the recent jet order. In a statement on July 1, Boeing called China’s purchase “a disappointment.”

Software and consumer goods companies are also cutting their outlook for international markets. Microsoft, Coca-Cola and Procter & Gamble are among some U.S. multinationals that have lowered earnings forecast for the rest of 2022 due to exchange-rate risks.

What keeps the dollar strong amid high inflation?

“The ongoing recovery from the pandemic, as well as the rapidity with which the Federal Reserve has responded to inflationary pressures, account for some of the dollar’s strength,” said Peter C. Earle, an economist with American Institute for Economic Research, a think tank.

Since the beginning of the year, the Fed has raised interest rates multiple times in an attempt to quell inflation. Europe is facing similarly steep inflation stemming from the war in Ukraine, but the European central bank has yet to raise rates as aggressively as the Fed. In Japan, where inflation is much more subdued, the Bank of Japan has kept its main rate at near zero.

That means interest-bearing assets denominated in U.S. dollars are more attractive to investors compared with assets based on foreign currencies. Like goods and services, the value of a currency is determined by supply and demand. As investors flock to the dollar, the value of other currencies drop.

Also fueling the demand for dollar-based assets is growing economic and geopolitical uncertainties, Earle added. As of June, the U.S. dollar accounts for almost 60 percent of global central bank reserves, according to the International Monetary Fund.

Mixed impact on American consumers and businesses

Domestically, the impact of a strong dollar means cheaper imports, which “blunts some of pain of mounting inflation for American consumers,” said Earle of the American Institute for Economic Research.

Thanks to a strong dollar, the price of imports, excluding fuel, has been falling for two consecutive months, according to the Labor Department‘s most recent reading on July 15. Over the past year, prices of non-fuel imports rose by 4.6 percent in June, roughly half of the increase of overall consumer prices.

A Strong Dollar Is Great News For America’s Consumers—But Not So Much For its Businesses