The Fed’s rate hike campaign has sent the dollar to a 20-year high – and the blowout could be yet another financial crisis.
Why it matters: A strong dollar affects the economy in several ways.
- Advantages: It should help lower oil prices – since oil is bought in dollars, a stronger dollar buys more oil, thus lowering the price of a barrel. In general, imports are cheaper for US consumers, which can also help reduce inflation.
- The worst: It will make the cost of US exports — especially the goods of US companies — too high for foreign buyers, dampening sales and hurting industrial towns.
How it works: Currencies rise and fall for a number of reasons, including trade flows, budget deficits and the country’s preference for foreign investors. But another big reason money moves depends on what central banks do with interest rates.
- The higher a country’s prices, the more it attracts international capital, which flows in and raises the value of that currency.
Observations: As with the stock market, the movement of money markets will be greatly influenced by inflation and whatever the Fed officials say or do in the next few weeks.
- Signs that a faster, steeper trend is coming could boost the greenback even more.