Americans have long complained that the dollar doesn’t buy much anymore. Suddenly, the dollar’s problem may be that it buys too much — a change that has huge implications across the global economy for consumers, businesses, investors and governments.
The U.S. currency’s value has surged over the last nine months, reaching levels against some world currencies last seen more than a decade ago. In Europe, it now costs just $1.09 to buy one euro, down from $1.37 a year ago and almost $1.50 four years ago.
To put it another way, an American tourist strolling the streets of Paris this April can buy 25% more croissants, cafe au laits or mini Eiffel towers than a year ago with the same dollars.
The greenback’s advance has been even more dramatic against some rivals. With its latest rally, one buck buys 30% more Swedish kronor than a year ago, 40% more Brazilian reais and 61% more Russian rubles.
U.S. Dollar Index
The breadth of the rally has taken Wall Street by surprise. The dollar “has gained ground against every single major currency and most emerging-market currencies,” said Camilla Sutton, a foreign-exchange strategist at Scotiabank in Toronto.
The basic explanation for the return of the almighty dollar is that the U.S. economy is in better shape than most of the rest of the world, attracting investment and thereby raising demand for dollars. A standard assumption of capitalism is that money will go where it’s treated best — the strongest economic growth, say, or the most attractive interest rates.
But the rapid devaluation of other currencies against the dollar is being abetted by foreign governments and their central banks.
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In a global economy struggling to grow, a nation that lets its currency sink in value puts itself on sale. That, in turn, can help revive growth by slashing prices of the country’s exports and by making its stocks, real estate and other assets relative bargains for foreign investors.
“Countries are fighting for market share,” said Richard Bernstein, head of money management firm Richard Bernstein Advisors in New York. “How do you get it? You make your currency cheaper.”
The danger is that this could become a downward spiral, with each country trying to out-devalue the others. Some experts fear that the devaluation wave could lead to a new financial crisis.
And for devaluation to work as countries hope depends in large part on America playing along as lone strongman — putting U.S. companies at what could become a serious economic disadvantage.
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