After rising again Friday, the dollar is near its highest level in more than two decades against a key index measuring six major currencies, including the euro and Japanese yen.
The dollar’s rise affects nearly everyone, even those who will never leave the U.S. borders. Here’s a look at what’s driving the U.S. dollar higher and what it can mean for investors and households:Essentially that one dollar can buy more of another currency than it could before.
The U.S. Dollar index, which measures the dollar against the euro, yen and other major currencies, has climbed more than 14% this year. The gain looks even more impressive compared against other investments, most of which have had a dismal year. U.S. stocks are down more than 19%, bitcoin has more than halved and gold has lost more than 7%.Even though inflation is high, the U.S. job market has remained remarkably solid.
Other central banks have been less aggressive than the Fed because their economies seem to be more fragile. The European Central Bank just raised its key rate by the largest amount ever, three-quarters of a percentage point. But the Fed has already raised its key rate by that amount twice this year, with a third expected this upcoming week. Some traders even say a gargantuan hike of a full percentage point could be possible, following a hotter-than-expected report on U.S. inflation Tuesday.
When the dollar is rising against the euro, for example, European companies make more euros on each $1 of sales. With that cushion, they could cut the dollar price for their products and still make the same amount of euros. They could also leave the price in dollars alone and pocket the extra euros, or they could find some balance of the two.
At McDonald’s, revenue fell 3% during the summer from a year earlier. But if the dollar’s value had simply stayed put against other currencies, the company’s revenue would have been 3% higher. Microsoft, meanwhile, said changes in foreign-currency values sliced $595 million off its revenue in the latest quarter.
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