The greenback soars on higher-for-longer rates forecast
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The U.S. dollar is soaring.
Why it matters: Exchange rates shape a whole bunch of economic activity — from trade flows, to where travelers take vacation, to the true value of corporate earnings generated overseas and then sent home. They also help shape global commodity prices and impact the ability of emerging market countries to repay their dollar-based debts.
State of play: The U.S. dollar index — which benchmarks the greenback against a basket of major currencies — rose more than 7% since mid-July.
How it works: Currency values fluctuate for a bunch of reasons, including the government's indebtedness, the prospects for growth, and the demand for trade and investment in the country.
- But perhaps the biggest driver of currency fluctuations is interest rate differentials.
Details: When a country's interest rates are relatively high — as they are in the U.S. at the moment — they act as a sort of financial magnet, attracting capital from all over the world to invest in that country.
- And since you need a nation's currency in order to invest in that country, people buy the currency, pushing its value up.
Good or bad? That depends on where you sit in the economy.
- If you're a U.S. corporation that does a lot of exporting, like Boeing or Deere, for instance, the strong dollar is not your friend because it makes your goods more expensive for foreign buyers.
- The flip side: Companies that import supplies may find them cheaper.
- And if you're considering a vacation abroad, a strong dollar gives you more buying power when you're shopping on the Champs-Élysées.
- But if you're a person living in a poorer country, a surge in the dollar tends to wreak havoc on your economy.
What to watch: What executives have to say about the impact of the greenback on their bottom lines. We'll hear from a slew of them after the third-quarter earnings season begins next week.
- Profits at S&P 500 companies "are inversely correlated with the dollar, as international profits account for roughly a third of the total," wrote Morgan Stanley analysts in a note on Tuesday.
- "If higher-for-longer rates keep the dollar at recent levels, corporate profits will face a genuine headwind," they added.
