U.S. travelers finally ready to head out on that COVID-19-delayed European vacation will enjoy some extra buying power thanks to a dollar that’s hitting record-high values against the euro and other foreign currencies.
But the dollar’s steady rise over the past year is also exacerbating challenges for many domestic businesses that rely on international customer volume amid global inflation that continues to drive up prices.
What’s driving the dollar up? The dollar hit new 20-year highs on Wednesday and the euro tumbled to a new two-decade low as rising energy prices and potential shortages cast a long shadow over the eurozone’s economy, according to Reuters.
The dollar index, which tracks the greenback versus a basket of six currencies, shot above 107, while the euro tumbled below $1.02, both for the first time since December 2002.
The dollar has strengthened as energy prices are high and the Federal Reserve has been raising interest rates more quickly than most other central banks, Shahab Jalinoos, global head of macro trading strategy at Credit Suisse, told Reuters.
“You have traditional macro factors that are driving dollar strength right now,” Jalinoos said.
The United States is a net energy exporter, while Germany is running a trade deficit for the first time since 1991, he said.
“High interest rates in the U.S. and a trade shift which is beneficial to the U.S. adds to sustainability of the dollar’s strength,” he said.
Europe’s woes: The European Union is experiencing inflation-driven increases to the costs of goods and services very similar to those in the U.S. But, so far, the Europe Central Bank, unlike the U.S. Federal Reserve, has yet to make a move on bumping interest rates to cool off spending.
That’s about to change.
The European Central Bank has signaled its intent to raise interest rates for the first time in a decade at its meeting this month.
But as the eurozone’s economic outlook darkens, investors are concerned that the central bank has moved too late, and may not have much time to raise rates before a recession forces it to change course, according to The New York Times. There are growing predictions that the eurozone economy could slip into recession, especially if energy supplies continue to be disrupted.
“Europe is the weakest link in the global economy,” Joe Quinlan, head of market strategy for Merrill and Bank of America Private Bank, told the Times. “They’re in the crosshairs of the war and the energy crisis.”
The euro’s slide makes imports more expensive for people and businesses in the 19 countries that use the currency, adding to the region’s inflationary woes, per the Times. It also reduces the value of European sales for American companies, presenting “one more variable that investors have to be aware of on the downside for earnings,” Quinlan said.