WASHINGTON – The US dollar has risen so much that it is nearly equal in value to the euro for the first time in 20 years. This trend, however, threatens to hurt American companies as their products become more expensive for foreign buyers. If US exports were to weaken as a result, so would the already slowing US economy.
Yet there is also a silver lining for Americans: a stronger dollar offers modest relief from runaway inflation because the wide range of goods imported into the United States – from cars and computers to toys and medical equipment – becomes cheaper. A strengthened dollar also offers good deals for American tourists visiting Europe, from Amsterdam to Athens.
The U.S. dollar index, which measures the value of U.S. 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 rising primarily because the Federal Reserve is raising interest rates more aggressively than other countries’ central banks in its effort to quell the highest US inflation in four decades. Fed rate hikes drive US Treasury yields higher, attracting investors looking for higher yields than they can get elsewhere in the world. This increased demand for dollar-denominated securities, in turn, drives up the value of the dollar.
Also contributing to the currency’s appeal, notes Rubeela Farooqi of High Frequency Economics, is that despite concerns about a possible recession in the United States, “the US economy is on stronger footing compared to the Europe”.
Not since July 15, 2002 has the euro been valued at less than one dollar. On that day, the euro broke above parity with the dollar as huge US trade deficits and accounting scandals on Wall Street sent the US currency plummeting.
This year, the euro has slumped largely on growing fears that the 19 countries that use the currency could slide into recession. The war in Ukraine has boosted oil and gas prices and punished European consumers and businesses.
In particular, the recent cut in natural gas supply from Russia has sent prices skyrocketing and raised fears of a blackout that could force governments to ration energy to industry to spare homes, schools and hospitals. (European leaders denounced Moscow’s move as an effort to blackmail Europe for backing Ukraine and enacting Western sanctions following the Russian invasion.)