The recent hawkish Fed comments have bolstered the U.S. dollar and supported foreign currencies, especially the foreign-exchange market.
The stronger dollar makes U.S. goods more expensive for foreign buyers, which drives up the cost of living for Americans.
The stronger dollar also makes imports more expensive, hurting American companies and consumers in the long term.
And according to many economists, the current rate of inflation is too low.
To keep up with growing domestic demand and avoid a rate hike that would hurt the economy, the Fed will have to keep raising interest rates further.
As a result, the level of the U.S. dollar against other major currencies has increased in recent weeks.
Read on to see what this means for global stock markets and the US dollar in the long run.
What does a stronger dollar mean for global stock prices?
Stronger dollar may boost shares of U.S. stocks
Stronger dollar may boost shares of U.S. stocks The stronger dollar has been a positive for stocks in the United States and abroad. This is because some of the increased demand for American exports has been absorbed by global markets and made good by higher prices for American-made products. Stocks in the U.S. rose by more than 1% in late August and early September as the stronger dollar made U.S. exports more valuable.
How much does a stronger dollar cost U.S. residents?
Stronger dollar costs U.S. consumers more
The higher price of imported goods means that U.S. consumers must pay more for everything. But that also means that consumers in other countries must pay more for products made in the United States. And that has led to a trade war between the world’s two largest economies.
The recent increase in U.S. interest rates has also been felt by foreign bondholders in the form of higher borrowing costs. These higher costs have made imported goods more expensive for U.S. consumers, hurting the whole economy.
More expensive imports can hurt U.S. consumers
The stronger dollar makes U.S. exports more attractive
Exporters can also benefit from a stronger dollar. By increasing the price of imported goods in U.S. markets, a stronger dollar makes exports more attractive to international buyers.
To be sure, some exporters will benefit more from a stronger dollar than others. And some types of products may be more profitable to make in the United States than elsewhere.
The stronger dollar makes the U.S. dollar more valuable for exporters
Exporters can benefit from a stronger dollar
So far, a stronger dollar has given exporters a competitive advantage as it has made their products more attractive to international buyers. But that advantage may fade over time as the long-term effects of a weaker dollar become apparent.
Moving toward a weaker dollar? Why not?
Some economists believe that the dollar should remain fairly stable, regardless of economic conditions. This view is known as the “neutrality of dollar” theory. Another school of thought sees a weaker dollar as a positive, as it can make American goods more attractive to exporters and American companies more profitable.
As the dollar weakens, American manufacturing and agricultural products can find new customers abroad, while American-sourced products become more expensive in foreign markets.
The stronger dollar is a positive for the U.S. economy and the rest of the world. It makes U.S. goods more expensive for foreign buyers, which drives up the cost of living for American residents. And it can make imported goods more expensive for American companies as well, which can hurt American businesses and consumers in the long run.
That said, a stronger dollar does not mean that the U.S. economy is in bad shape. On the contrary, a stronger dollar can make the U.S. economy stronger by making imported products more expensive for the rest of the world.