A stronger dollar is a pain for companies. But with U.S. assets still looking attractive to overseas buyers, the currency is likely to stay strong.
Apple
,
and
are among the companies that have recently complained about the dollar’s rise. The dollar index, a gauge of the currency’s strength against a basket of five peers, has advanced more than 4% this year. That reduces the value of sales made overseas in other currencies and, in
Disney
’s
case, discourages foreign visitors from coming to its U.S. theme parks.
The main reason for the dollar’s climb is because the Federal Reserve raised interest rates faster and sooner than other central banks after the pandemic. It also has yet to cut rates since then—unlike the European Central Bank—which is responsible for the second-biggest currency bloc. In Europe, unexpected elections this year in France have also stoked demand for dollar assets.
“When will the dollar’s appeal fade?” asks Société Générale economist Kit Juckes in a note Monday. “The answer is not yet, as the U.S. sucks up all the rest of the world’s savings, partly because the U.S. is exceptional, and partly because it has marched to a different tune to the rest of us.”
Higher interest rates relative to others make U.S. investments more attractive by offering larger returns. That’s certainly been the case for U.S. bonds, considered both the safest in the world and yielding almost twice as much as the comparable German bunds. The gains in stocks of the past few years, driven by technology names like
and
Tesla
,
have also helped attract funds into the U.S., which pushed the dollar higher.
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The dollar also has the advantage of being the world’s reserve currency, meaning many international contracts and commodities such as oil and steel are priced in dollars. That means that dollars are always in demand.
But a strong greenback doesn’t only make life more difficult for U.S. companies. It can also cause instability. The Japanese yen, for example, recently fell to its weakest level since 1986, prompting speculation that the country would intervene to strengthen its currency.
On the flip side, a strong dollar is good for American tourists. While it may be a burden for companies, people visiting the Paris Olympics this summer will find it makes things cheaper.
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Write to Brian Swint at brian.swint@barrons.com
