November 21, 2022

The Federal Reserve has been increasing interest rates to battle inflation. Unfortunately, it’s not evident yet if those efforts are working. The last few consumer price index (CPI) reports, which track prices consumers pay on goods and services, continue to rise. That may indicate the Fed isn’t being aggressive enough in its efforts.

Another possible headwind in all this is the strength of the U.S. dollar. It soared to record highs against other global currencies this year while the British pound has fallen to a record low versus the dollar. The all-time record high for the U.S. dollar occurred in the early 1980s, but it’s rarely been higher than it is now.

A strong dollar has pros and cons.

For one, travelling abroad is less expensive because the dollar gets more local currency when converted. Dollar-denominated travelers have more buying power when the dollar is strong.

Also, imports are cheaper. Goods produced abroad and brought to the U.S. will be less expensive if the manufacturer’s home currency falls in value compared to the dollar. So for instance, European luxury vehicles will fall in dollar value. If the dollar continues to strengthen, other imports will fall in price too.

But there are downsides of a strong dollar. For one, tourism in the U.S. is more expensive. Foreign travelers will find things more costly here.

And as imports gain with a strong dollar, exports lose. Goods we produce here and sell abroad become more expensive. This hits large multinational companies like McDonald’s and Phillip Morris hard because foreign sales are worth less on the balance sheet.

The fates of the dollar and inflation are yet to be decided. That said, on current view, we need to see less strength in both for a smoother overall ride.