The strongest US dollar in 20 years is a double-edged sword
Strong greenback boosts US economy but erodes profits for big multinationals
The consensus in the market is future inflation expectations will fall dramatically: Nancy Davis
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The American economic outlook is crumbling as recession fears grow, but there remains at least one bright spot: The U.S. dollar, which accelerated to a fresh 20-year high this week.
Risk aversion amid growing fears about a global recession has sent investors fleeing toward the greenback as a safe haven of sorts as the Federal Reserve hikes interest rates at the fastest pace since 1994 in order to curb white-hot inflation.
Fed policymakers have already approved five straight interest rate increases – including three back-to-back 75-basis-point hikes – and have expressed resolve to continue tightening policy until there's clear evidence that inflation has cooled.
The world's reserve currency has climbed about 7% so far in the third quarter, after surging 5.7% in the first half of the year.
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In this photo illustration, U.S. dollar bills are are pictured on September 24, 2022 in Bath, England. ((Photo by Matt Cardy/Getty Images) / Getty Images)
But a strong dollar comes with a mixed bag of pros and cons.
For the first time in two decades, the euro and the dollar achieved parity over the summer, meaning the currencies have a 1:1 exchange rate. That 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 they are overseas.
And it's not just the euro: The dollar has increased in value to a number of other foreign currencies too, including the British pound.
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What's more, the dollar has helped U.S. importers that buy goods from overseas, because purchases are now less expensive. That will likely boost gross domestic product – the broadest measure of goods and services produced in the U.S. – in the third quarter.
"The strong U.S. dollar will provide a tailwind for GDP growth in the third quarter," said Jeffrey Roach, chief economist at LPL Financial. "However, significant weakness in Europe and Asia will diminish demand for U.S. exports as the global economy heads into the winter months."
Jerome Powell, chairman of the U.S. Federal Reserve, arrives to speak during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, D.C., US, on Wednesday, Sept 21, 2022. (Photographer: Sarah Silbiger/Bloomberg via Getty Images / Getty Images)
However, there are downsides to the dollar's strength: Executives of multinational corporations with headquarters in the U.S. have said the muscular greenback is dinging their profits.
"We had a great quarter, but yet again, the dollar had an even stronger quarter," Salesforce CEO Marc Benioff said during a recent earnings call.
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The San Francisco-headquartered company – which sells software across the globe – has estimated the dollar could shave about $800 million from its sales this year.
Procter & Gamble, meanwhile, has forecast a $900 million after-tax hit in the fiscal year ending in June 2023 as a result of the dollar's strength.