Jul 15, 2022 - Economy

What the dollar's surge means for the economy

Data: ICE, FactSet; Chart: Axios Visuals
Data: ICE, FactSet; Chart: Axios Visuals

The Fed's rate-hiking campaign has sent the value of the dollar to 20-year highs — and the surge could be another headwind for the economy.

Why it matters: A stronger dollar affects the economy in a bunch of ways.

  • For better: It should help put a cap on oil prices — since oil is priced in dollars, a stronger dollar buys much more oil, thus driving the per-barrel price lower. More broadly, foreign imports get cheaper for U.S. consumers, which could help ease inflation, too.
  • For worse: It will make the cost of U.S. exports — especially U.S. industrial goods — much higher for foreign buyers, depressing sales and likely hurting factory towns.

How it works: Currency values rise and fall for a number of reasons, including trade flows, budget deficits and how attractive a country is to foreign investors. But another key reason currencies move is based on what central banks do with interest rates.

  • The higher a country's rates, the more attractive it is to global capital, which flows in and pushes the value of the currency up.

What to watch: Like the path of the stock market, moves in the currency markets are going to be heavily influenced by inflation and whatever Fed officials say or do over the next few weeks.

  • Signals suggesting that a faster, steeper series of hikes are coming could strengthen the greenback even more.
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