A strong US dollar — when the value of the dollar is near record high exchange rates compared to other currencies — may make you feel patriotic. But it isn’t all sunny skies and American flags. Here’s what it means for your wallet.
Why Is the US Dollar Strong Now?
It’s all relative. The greenback has been sitting at 20-year highs since May. That’s based on the US dollar index, aka one measure of the dollar’s value against six rivals: the euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona. When it's up, it means the US dollar is gaining value compared with those currencies. For example, the US dollar was worth about 0.89 euro in December 2021, but the currencies reached near-parity in July 2022 — for the first time since 2002. And experts say that the US dollar will probably keep getting stronger.
Why? Mostly because inflation is expected to remain high.To help bring prices down, the Fed has started to slow down, aka "taper," its bond-buying pandemic-relief program and raise interest rates.When interest rates go up, investors tend to favor "dollar-denominated assets" (meaning investments paid out in US dollars) like Treasury bonds. Which then pushes up the dollar’s value more.
Another reason for a strong dollar: the US is recovering better than most other economies and stock markets around the world. So the dollar’s value is going up relative to competing currencies.
What to Do With Your Money When the US Dollar Is Strong
Here's what to do with your money when the US dollar is on the rise.
Comparison shop.While prices on US products are rising thanks to inflation, a strong dollar can drive down the price of imported goods if the value of the manufacturer’s currency drops. Meaning you could pay lessfor products not made in the USA.
Don’t put all your investments in one basket. US companies that do a lot of business overseas could see their stocks suffer when the exchange rate eats into their profits. Oh, and heads up crypto owners. The Fed's upcoming anti-inflation plans could hit hard. Because more cash flowing into safer, dollar-denominated assets as a result of higher interest rates means money flows out of riskier ones like crypto. So be sure to spread your money across many investment types. That way, when some of your investments are down, others can hold you up.
(Safely) take advantage of travel deals. With COVID-19 variants circulating, health concerns and other travel issues (hi, pilot shortage) could force you to press pause on any vacay plans. But if and when you can travel safely, the good news is that a strong dollar means your money goes further compared to other currencies. So you get more bang for your buck when you check another country off your ‘been there’ list.
The US dollar has been riding high lately. Meaning your money goes further in other currencies and when you’re buying imported goods. That’s a good thing. But it can also cause trouble for American companies that make big money in other countries — just another reason to keep your portfolio diverse.
Updated July 11 with the most recent US dollar index, Federal Reserve, and inflation news.
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