on October 18, 2022
The U.S. dollar is having a moment. Never before has the value of the USD been so close to the British pound. On top of that, the USD is now essentially equal in value to the Euro, and has gained significant value against many other currencies, including the Australian dollar, the Japanese yen, and the Indian rupee. According to Forbes, “The U.S. Dollar Index, which measures the greenback against a basket of other currencies, is up nearly 17% so far this year.”
This may seem like odd news when the stock market has had a string of bad months and there’s constant talk of a recession (although, to be fair, the media loves to amplify bad news!). However, there are perfectly logical reasons for the dollar’s current strength.
Why IS the dollar so strong right now? And what can you do to take advantage of its solid performance?
Several factors are likely contributing to the dollar’s robustness. Analysts point to the war in Ukraine as one of the reasons European (and other) currencies have taken a hit. During times of global uncertainty, other countries and foreign investors tend to sock away their reserves in U.S. dollars, since this is viewed as a safe and reliable currency. When the world is in turmoil, the dollar tends to prosper.
Another reason (and likely the main reason) for the dollar’s performance is the Federal Reserve’s recent actions to combat inflation. As David Gura of NPR sums up, “The Federal Reserve is ratcheting up interest rates to attack the current near-constant rise in prices and said last week it expects more hikes this year. As it continues to raise rates, the dollar will strengthen.” This is the natural outcome of the Fed’s actions.
The dollar’s strength does have its downsides. For instance, big multinational companies like Microsoft or Walmart will suffer because a portion of their revenue comes from foreign transactions, which of course, involves (relatively weak) foreign currency.
However, the average consumer (you!) can take advantage of the dollar’s strength. Here are 3 ways to do so.
Take a Trip!
One of the most obvious (and fun!) ways to take advantage of the favorable exchange rate is to travel to a European destination, or to another country, like Australia, where the USD is performing stronger than the national currency. If you are already planning a vacation in the next few months, consider traveling abroad.
Keep in mind, banks will still charge a fee to exchange currency, and that fee may be pretty high. To secure a better exchange rate, it’s a good idea to withdraw local currency from an ATM once you arrive at your destination. Some banks will even reimburse ATM withdrawal fees (even when using an international ATM).
You might also consider booking a few aspects of your trip ahead of time to lock in the current exchange rate. Hotels, transportation, and tours could all be booked in advance.
Buy Imported Goods
We live in a truly global society, which means you can easily visit retail websites from all over the world. If your favorite shoe company is based in Germany, or you love handbags from a certain French company, or you adore a specific Spanish wine, now is the time to stock up! If you consider what the exchange rate was this time last year, you are essentially gaining a 15% discount.
Invest
Historically, when the dollar is performing well, that helps both the stock market and the national economy. As Compass Capital Management reports, “In general, a stronger dollar is likely to be both a market and economic positive. Since 1980, the stock market has performed twice as well during dollar bull markets than dollar bear markets and has posted gains every year following years when the dollar appreciated by more than 10%.”
As an experienced financial advisor, I’m not worried about the long-term vitality of the U.S. stock market. It has always gone through periods of highs and lows, and this era is no different. Besides, buying during low points in the market is a sound strategy for many people (as always, talk to your financial advisor before making any extreme decisions).