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4 Ways the Soaring Dollar Affects Your Wallet
Cheaper travel abroad bigger losses in retirement funds are just two
iStock / Getty Images You may have heard about the rocketing value of the U.S. dollar on the international currency exchanges.
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Unless you’re a foreign exchange dealer, you probably don’t give it too much thought. Perhaps you should. The greenback is the default international medium of exchange, no matter what cryptocurrency traders say.
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Oil is traded in dollars, for example, and some countries, such as Saudi Arabia, peg their currencies to the dollar. Why is the dollar so strong?
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Despite and a falling stock market, the U.S. economy is still the largest in the world, with gross domestic product (GDP) weighing in at close to $23 trillion, according to the World Bank.
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China, the second-largest country by GDP, trails by more than $5 trillion at $17.7 trillion, and Japan, the third-largest, comes in at $5 trillion. Get instant access to members-only products and hundreds of discounts, a free second membership, and a subscription to AARP the Magazine. Compared with the rest of the world, the U.S.
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offers temptingly high yields, and money flows to those high yields, boosting the dollar’s value. A 10-year Treasury note yields 3.83 percent, which may not sound like much. In Germany, however, a 10-year government note yields 2.09 percent.
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In Japan, 10-year government debt yields 0.24 percent. Finally, the U.S. dollar is backed by the full faith and credit of the United States government, and the U.S. has never defaulted on its debt. With all that in mind, here are four ways the booming buck affects you and your finances.
1 It s cheaper to travel abroad
has extra benefits, aside from basking on the French Riviera or quaffing pints of beer in the United Kingdom.
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A year ago, you needed $1.16 to buy a euro, the currency of 19 European nations (Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain). On Oct.
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7, it cost 98 cents to buy a euro, meaning that a 100-euro purchase today is $18 cheaper than it was a year ago. Groceries 20% off a Freshly meal delivery subscription See more Groceries offers >
2 Imports are cheaper
A strong dollar means that U.S. importers can buy goods from abroad at .
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A 1 percent rise in the value of the dollar lowers non-petroleum import prices by 0.3 percent, according to a study by the Federal Reserve Bank of Cleveland. That, in turn, lowers inflation, and sometimes dramatically.
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“If you look at import price declines, it’s been close to 1½ percent per month,” says Michael Englund, chief economist for Action Economics. Imported commodity prices have been falling, too: About 80 percent of U.S.
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softwood lumber imports come from Canada, and lumber prices are back down to pre-pandemic levels. As the dollar rises, you could get , because an estimated 99 percent of all shoes sold in the U.S. are imported, according to the Footwear Distributors & Retailers of America.
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Similarly, many children’s toys are made in China, which actively pushes the value of its currency down to increase its exports. (This has somewhat been offset by tariffs, which are taxes imposed on U.S. buyers of certain imports.) The price of toys has risen just 2.8 percent in the 12 months ended August, according to the U.S.
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Bureau of Labor Statistics, compared with 8.3 percent for consumer prices in general.
3 Exports are more expensive
You probably don’t care what Germans pay for U.S. wheat or coal, but farmers and miners do.
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The increase of the U.S. dollar means that U.S.
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exports are more expensive than they were this time last year, and typically that means some U.S. companies will struggle against local competitors.
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LEARN MORE ABOUT AARP MEMBERSHIP. Get instant access to members-only products and hundreds of discounts, a free second membership, and a subscription to AARP the Magazine. .
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Or you may have an all-in-one fund in your 401(k) account that figures out where to invest for you. It, too, probably has international holdings. Unfortunately, going international has just made a nasty market nastier.
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France’s stock market, for example, has fallen 19.1 percent this year when measured in euros, according to MSCI, which tracks international markets. Translated into dollars, it’s down 31 percent.
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Although international investing does help diversify your holdings, this year it just means that you’ve lost more money than in U.S. stock funds, albeit with a bit more je ne sais quois. John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and USA Today.
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