Surge in US dollar’s value abroad offers pros, cons

Stronger buck restrains cost of imports, but hikes prices of America’s exports

WASHINGTON — The U.S. dollar has been surging so much that it’s nearly equal in value to the euro for the first time in 20 years. That trend, though, threatens to hurt American companies because their goods become more expensive for foreign buyers. If U.S. exports were to weaken as a result, so too would the already-slowing U.S. economy.

Yet there’s a positive side for Americans too: A stronger buck provides modest relief from runaway inflation because the vast array of goods that are imported to the U.S. — from cars and computers to toys and medical equipment — become less expensive. A strengthened dollar also delivers bargains to American tourists sightseeing in Europe, from Amsterdam to Athens.

The U.S. Dollar Index, which measures the value of American money against six major foreign currencies, has jumped nearly 12% this year to a two-decade high. The euro is now worth just under $1.02.

The dollar is climbing mainly because the Federal Reserve is raising interest rates more aggressively than central banks in other countries in its effort to cool the hottest U.S. inflation in four decades.

The Fed’s rate hikes cause yields on U.S. Treasurys to rise, which attracts investors seeking richer yields than they can get elsewhere in the world. This increased demand for dollar-denominated securities, in turn, boosts the dollar’s value.

Also contributing to the currency’s appeal, notes Rubeela Farooqi of High Frequency Economics, is that despite concern about a potential recession in the United States, “the U.S. economy is on firmer footing compared to Europe.”

Not since July 15, 2002, has the euro been valued at less than $1. On that day, the euro blew past parity with the dollar as huge U.S. trade deficits and accounting scandals on Wall Street pulled down the U.S. currency.

This year, the euro has sagged largely because of growing fears that the 19 countries that use the currency will sink into recession.

The war in Ukraine has magnified oil and gas prices and punished European consumers and businesses.

In particular, Russia’s recent reduction in natural gas supplies has sent prices skyrocketing and raised fears of a total cutoff that could force governments to ration energy to industry in order to spare homes, schools and hospitals.

Economists at the Hamburg, Germany-based merchant bank Berenberg have calculated that at current rates of consumption the added gas bill would be $224 billion over 12 months, or a whopping 1.5% of annual economic output.

A European slowdown could eventually give the European Central Bank less leeway to raise rates and moderate economic growth to address its own inflation problem.

The ECB has announced that it will raise its key interest rate by a quarter-point when it meets later this month and possibly by up to a half point in September. A weaker euro feeds inflationary pressures by making imports to Europe more expensive.