Jul 6, 2022 - Economy

The dollar’s "remarkable" double-edged sword

Illustration of a pattern of dollar bills fading from left to right.

Illustration: Brendan Lynch/Axios

The U.S. dollar has emerged as the biggest beneficiary of the recession fears ricocheting across markets. It has left a few winners — but lots of losers — in its wake.

Why it matters: A combination of safe-haven buying and interest rates has sent the undisputed heavyweight champion of global reserve currencies to its highest levels in at least two years against major counterparts. That comes with a mix of positives and drawbacks, some of which will become apparent as second quarter earnings start rolling in.

  • Yields that offer higher returns than other global currencies are boosting the dollar’s value, and helping restrain import inflation.
  • As Axios’ Courtenay Brown points out, it’s a good time for American tourists to visit Continental Europe, with the euro lodged near a 20-year low.
  • But multinational companies will inevitably feel the pain when translating foreign earnings from battered currencies into dollars, impacting Q2 results.

Zoom out: The muscular dollar may also create political headaches for export-reliant economies like Japan and the euro zone, whose goods automatically become cheaper in foreign markets.

  • That sparks accusations of “beggar-thy-neighbor” FX policies, where cheaper goods get a boost from the weaker currency in foreign markets, even as domestic inflation rises.
  • It can lead to trade wars, and potential charges of “currency manipulation” by U.S. authorities.

What they’re saying: Nick Colas, DataTrek’s co-founder, noted last month that the dollar’s “remarkable” strength has played a role in every major market meltdown since 1970.

  • “To see so many of the developed world’s major currencies either at or through multi-year lows to the greenback is very concerning,” Colas wrote.
  • “We doubt global equities can stage any meaningful recovery until currencies stabilize and [we] worry that further weakness here will cause further stock market declines,” he added.

Our thought bubble: Despite being a fiat currency sandbagged with soaring inflation, endless government deficit spending and a sclerotic political system, the dollar once again proves it's the "cleanest dirty shirt" in the global financial system.

Go deeper