The pros and cons of a strong dollar: A look at the facts

With the current uncontrollable high inflation rates, the US dollar is at its high. The US currency is at its big moment now as Central banks are trying to lessen the impact of inflation internationally.

This year, the US dollar index is more than 20% compared to the Japanese yen and Euro. The dollar is strong when it soars in value against other currencies in the world market. This means a stronger US currency is capable of buying more foreign currencies.

Jonathan Wright, an economics professor at Johns Hopkins Hopkins University, said, “The Fed is raising short-term interest rates quite steeply and is doing so more quickly than other central banks. And so that makes dollar-denominated assets more attractive.”

If the US dollar is strong, it can positively impact some but negatively affect others. To further discuss the advantages and disadvantages of having a stable and stronger dollar.

Pros of a Strong US Dollar

It is beneficial to foreign companies in the US.

Multinationals and their investors dealing with their businesses in the US will benefit. These companies with large revenues are earning in US dollars. Thus, the earnings in the US currency will appear as gains on their accounting records.

Product imports are cheaper.

If a US company imports products abroad, the goods will be cheaper if the manufacturer’s currency is lower than the US dollar.

Traveling overseas is cheaper.

If you’re a traveler using US dollars abroad, you’ll notice that your dollar can go further. You can afford to buy more when your dollars are converted to a local currency. The prices of goods abroad aren’t greatly affected by the changes in the US economy.

It's unlikely the growing strength of the dollar will change in the next few months, Jonathan Wright says. https://t.co/dDjNCL4lAR

— FORTUNE (@FortuneMagazine) October 4, 2022

Cons of a strong US dollar

US businesses abroad carry the burden.

In contrast to foreign companies earning more in the US, companies in the US will suffer. If a large portion of their earnings come from their businesses in other countries, they earn in a foreign currency. It will show a decline in value in their balance sheets. Hence, creating a negative impact on the business.

Traveling to the US is more expensive.

Travelers from other countries going to the US will notice the prices of goods are more costly with a stronger dollar. Foreigners in the US and business travelers will feel their cost of living is more expensive now. This is the case if their salaries are in their country’s currency.

Exporters are hurt

While imports are cheaper, US goods are more expensive abroad. Experts say expensive exports risk more US jobs.

On a positive note, a stronger US dollar might push inflation down. Wright says that this is due to the cheaper price of making imports. In addition, he also said, “But even without any actual trade going on at all, it’s putting pressure on earnings for multinational subsidiaries.”