The US economic outlook is collapsing as recession fears intensify, but at least one bright spot remains: The U.S. dollarwhich accelerated to a 20-year high this week.
Risk aversion amid mounting concerns about a global recession has caused investors to flee toward the dollar as a safe haven of sorts. Federal Reserve Raising interest rates at the fastest pace since 1994 in order to rein in white inflation.
Fed policymakers have already approved five outright interest rate increases – including three consecutive increases of 75 basis points – and have indicated their intention to continue tightening policy until there is clear evidence that inflation has subsided.
The global reserve currency is up about 7% so far in the third quarter, after rising 5.7% in the first half of the year.
But a strong dollar comes with a mixed bag of pluses and minuses.
For the first time in two decades, it was euro and dollar check Parity during the summer, which means the currencies have a 1:1 exchange rate. This is good news for Americans traveling to Europe this year, because they can expect to pay less for things like hotel rooms and meals while abroad.
And it’s not just about the euro: the dollar has appreciated against a number of other foreign currencies as well, including the British pound.
Moreover, the dollar helped US importers buying goods from abroad, because purchases are now less expensive. That is likely to boost GDP – the broadest measure of goods and services produced in the US – in the third quarter.
“A strong US dollar will provide a tailwind to GDP growth in the third quarter,” said Jeffrey Roach, chief economist at LBL Financial. “However, significant weakness in Europe and Asia will reduce demand for US exports as the global economy approaches the winter months.”
However, there are downsides to the dollar’s strength: Executives of multinational companies headquartered in the United States have said that the strong US currency is lowering their profits.
“Our quarter was great, but again, the dollar saw a stronger quarter,” said Marc Benioff, CEO of Salesforce during a recent earnings call.
The San Francisco-based company — which sells software worldwide — estimated that the dollar could generate $800 million in sales this year.
Meanwhile, Procter & Gamble forecast an after-tax value of $900 million in the fiscal year ending in June 2023 as a result of a stronger dollar.
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