Illustration: Rebecca Zisser/Axios
Soaring U.S. interest rates have propelled the greenback to its strongest in nearly two years.
Why it matters: The resurgent dollar helps contain inflation, making imported goods cheaper. But it could become a headache for multinationals, as it crimps earnings when companies convert revenues earned abroad into dollars.
The big picture: The recent sell-off in U.S. government bonds drove up rates, making U.S. assets more attractive and boosting global demand for the dollar, the world’s top reserve currency and a safe haven.
State of play: The difference between U.S. government bond yields and those of Europe and Japan have sent the latter two currencies reeling.
- The dollar has added 10% against the Japanese yen and 5% against the euro this year.
What they’re saying: Marc Chandler at Bannockburn Global Forex notes that “amid a historic sell-off in bonds, foreign investors have bought a record amount of U.S. securities over the six months through February (average $126 billion a month),” according to official data.
- “Yes, someone has been selling U.S. bonds, but it does not look like it was Japan or central banks. Foreign investors have been significant buyers of U.S. assets through February,” Chandler noted.
The impact: Consumers are pretty indifferent to currency fluctuations because the effects are often behind the scenes. But sometimes, they spring into view in ways that hurt big U.S. companies.
- Most notably, the yen is languishing near a 20-year low against the dollar, which tends to make the U.S. manufacturing sector nervous. Historically, U.S. carmakers have been sensitive to the dollar-yen exchange rate, amid fears that the U.S. market will get flooded with cheap imports.
What to watch: So far this earnings season, companies have been mum on the dollar — but it's still early days. And amid the dollar’s “relentless march higher…perceived wisdom is that, at some point, that strength becomes a headwind to U.S. equity performance,” according to Huw Roberts at Quant Insight.