Question 1

What does it mean when the dollar strengthens?

Accepted Answer

It means a dollar buys more of another currency than it did before. If yesterday a dollar got you 0.92 euros and today it gets you 0.95, the dollar strengthened against the euro. That one-line fact has a tail of consequences. Everything priced abroad becomes cheaper in dollars. Everything priced in the U.S. becomes more expensive to a foreign buyer. Dollars you send overseas buy more on the other end. The dollar did not physically do anything. The price tag on a global good is just the foreign price converted, and the conversion got friendlier.

Question 2

Who benefits from a strong dollar?

Accepted Answer

U.S. consumers who buy imported goods, which at the margin is most of them. U.S. travelers going abroad, whose hotel, meal, and train ticket all repriced lower without anyone doing anything. Anyone sending dollars overseas to family, because the exchange on the other end just got better. Importers whose cost of goods sold falls. The Federal Reserve, slightly, because cheaper imports help the inflation number. And short-dollar borrowers who live overseas but owe in dollars lose, which you might count as a benefit to the lender.

Question 3

Who is hurt by a strong dollar?

Accepted Answer

U.S. exporters, because their product now costs more in the foreign buyer's currency. A Boeing jet priced in dollars looks 10% more expensive to an airline in Europe when the dollar runs 10%, and Airbus is right there. U.S. multinationals with foreign revenue, because every euro of earnings translates into fewer dollars on the income statement. The U.S. tourism industry, because a European vacation to New York got more expensive for the European. And any foreign borrower who owes dollars, because the debt just got heavier in local-currency terms. Much of the emerging world lives in this trade.

Question 4

What causes the dollar to strengthen?

Accepted Answer

Four things, in decreasing order of how often they show up in the commentary. One, higher U.S. interest rates relative to the rest of the world, because yield attracts capital and capital is bid in dollars. Two, risk-off episodes, because in a panic the world wants the deepest, safest asset and that asset is a Treasury. Three, stronger U.S. growth, because faster growth draws investment. Four, policy divergence, when the Fed is hiking while the ECB or the BoJ is on hold. The first one explains most of the moves. The rest explain the tails.

Question 5

How does the dollar affect inflation?

Accepted Answer

A stronger dollar is disinflationary. Imports and commodity inputs reprice lower in dollar terms, and that pass-through shows up in the goods portion of CPI, with a lag. The effect is real but not enormous, because the U.S. basket is mostly domestic services. Rent does not care about the dollar. Healthcare does not care about the dollar. Your haircut does not care about the dollar. Economists estimate that a 10% move in the trade-weighted dollar shifts core goods inflation by roughly half a percentage point over a year. The Fed watches it. Nobody sets policy on it alone.

The strong dollar, priced out.

Move the dollar, watch four lives change.

The strong dollar, answered.

The strong dollar, priced out.

Move the dollar, watch four lives change.

The strong dollar, answered.

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