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  • - [Narrator] The dollar is smiling.

  • Not literally, but its value has reached its highest point

  • since the early 2000s.

  • The increase fits into a theory known as the dollar smile.

  • It says the dollar typically gets stronger

  • when the U.S. economy is healthy.

  • Like when it saw a period of economic growth in 2014

  • or when the global economy faces unexpected shocks,

  • like we're seeing in 2022.

  • But it loses value when the U.S. economy

  • is on a downward trend compared to the rest of the world.

  • Like in 2008 during the Great Recession.

  • That's how the dollar smiles.

  • - So the dollar reaching multidecade highs.

  • And that's because we have the Fed

  • that's in the middle of hiking rates.

  • We also have people that are very worried

  • about the state of economy.

  • I mean, normally this kind of increase comes like over time,

  • over two, three years.

  • So this is an unexpected surge hire.

  • - [Narrator] While a strong dollar might seem

  • like something to be happy about,

  • it's impact across the world can be more complicated.

  • Here's how the dollar starts to smile

  • and the unexpected consequences it can have

  • for the global economy.

  • Let's look back at that smile.

  • One of the main reasons the dollar remains attractive

  • to investors at both ends of the economic spectrum

  • is because it is a dominant global reserve currency,

  • which means every country keeps a certain amount

  • of U.S. dollars in their central banks.

  • - For foreign economies, the wide use of the dollar

  • allows borrowers to have access to a broad pool

  • of lenders and investors.

  • - [Narrator] According to the international monetary fund,

  • nearly 7 trillion U.S. dollars are held by 149 countries.

  • - Investors like the dollar because it's stable.

  • They know that you have a country

  • where there's a central bank that is stepped in

  • to shore up markets and intervenes in the economy

  • at whatever cost to make sure it doesn't crash.

  • - [Narrator] Because so many countries rely on the dollar

  • for trade and various transactions,

  • that means there's always demand for it,

  • which makes it more valuable.

  • But that demand fluctuates and depends largely

  • on the state of the U.S. economy.

  • When the economy is healthy,

  • investors bet on economic growth that will lead

  • to eventual interest rate increases.

  • The theory dubs this end greed mode.

  • - If you're buying currencies, you wanna hold the one

  • that's gonna give you a higher rate of return

  • that's linked to your central bank's rate.

  • - [Narrator] On the other end of the smile,

  • when the economy is struggling,

  • investors can flee to the dollar as a more secure asset.

  • That's fear mode, the end we're at now.

  • - So the dollar's benefited from basically

  • a confluence of events, volatile financial markets,

  • fears around growth in the global economy,

  • supply chain issues stemming from the fact

  • that China is still dealing with COVID,

  • and we have a war in Europe

  • that's spreading an energy crisis there,

  • and we have global inflation.

  • So all of that combined has people basically jumping

  • into the U.S. dollar as a haven.

  • - [Narrator] A haven is an asset that can retain

  • or even increase its value during an economic downturn.

  • The dollar's strength is determined by measuring it

  • against other global currencies.

  • When it gets stronger, other currencies grow weaker

  • by comparison.

  • In July, the dollar and Euro reached parity

  • for the first time in 20 years.

  • And as the value of other currencies fall,

  • the impact of the strong dollar ripples

  • through the global economy.

  • The dollar is the main currency used in global trade.

  • That means that things like food and energy

  • are usually priced in dollars when they're bought

  • and sold among certain countries,

  • even if they aren't buying from the U.S.

  • - So basically their currency's weakened,

  • which makes everything more expensive for them,

  • which means price increases, which is inflation.

  • So you're basically, there's this concept

  • that a stronger dollar exports inflation

  • to emerging market countries.

  • - [Narrator] But a strong dollar can actually have

  • the opposite effect for Americans

  • by helping bring prices down.

  • - Strong dollar benefits you

  • because it makes importing goods and services cheaper.

  • People like that.

  • It makes traveling abroad for Americans cheaper.

  • That's also a good thing.

  • - [Narrator] But as imports get cheaper for the U.S.,

  • exports get more expensive for other countries.

  • U.S. products become less affordable

  • and therefore less attractive to consumers

  • and businesses abroad.

  • That means that U.S. companies

  • that make a significant portion of their profits overseas

  • can see a decline in sales.

  • Companies have already taken a hit this year.

  • Microsoft, Salesforce and Coca-Cola are just a few

  • that have pointed out the negative impact

  • of the strong dollar on their financial results.

  • Here's Microsoft's chief marketing officer,

  • after the company filed an 8-K,

  • which is a form that reports unexpected changes

  • to shareholders.

  • - Say, you know, if you saw the 8-K today it was purely,

  • it was purely currency.

  • Continued strength of the dollar,

  • essentially is what we talked about in that filing.

  • - [Narrator] About 40% of S&P 500 companies' revenue

  • comes from outside the U.S.

  • And a decline in sales and future earnings

  • tends to make stocks fall.

  • But these lower earnings and reduced import costs

  • can also help curve inflation by bringing prices down

  • and forcing companies to slow spending.

  • - You're cooling things down when you have

  • a stronger currency, very indirectly.

  • So some analysts will say, it's almost the equivalent

  • of a rate hike.

  • So it's kind of tricky.

  • It's good, but when it gets too strong,

  • it can start being damaging.

  • - [Narrator] Experts expect the dollar to stabilize

  • later this year, but it's unclear when that might be.

  • - What you would need for the dollar to stabilize

  • is inflation data to cool.

  • You would need geopolitical uncertainty to fade,

  • and you'd need a greater belief that the global economy

  • is back on track, and that growth is going to return,

  • and that financial markets are going to calm down.

  • - [Narrator] When the global economy starts to settle

  • the dollar will likely stop smiling.

  • (pleasant music)

- [Narrator] The dollar is smiling.

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Why a Strong Dollar Is a Double-Edged Sword for the U.S. Economy | WSJ

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    Yui posted on 2022/07/31
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