When the US dollar climbs, headlines call it a “strong dollar” as if that were simply good news. For Americans travelling abroad, it can be. But a strong dollar ripples across the world economy in ways that hurt some countries, companies and markets, and help others. Understanding who wins and who loses is one of the most useful pieces of macro knowledge a trader can have.
What people mean by a strong dollar
A strong dollar means the US currency has risen in value against other major currencies. The most common gauge is the US dollar index, which measures the dollar against a basket of currencies dominated by the euro, along with the yen, the pound and others. Our guide to the US dollar index explains how it works.
The dollar usually strengthens when US interest rates rise relative to other countries, when the US economy outperforms, or when investors seek safety during periods of stress.
Who it tends to hurt
Countries and companies that borrow in dollars are among the most exposed. When the dollar rises, their debts become more expensive to repay in their own currency. That can create stress in emerging markets in particular.
Importers of commodities can also suffer. Oil, gold and many raw materials are priced in dollars, so a stronger dollar makes them more expensive in other currencies, even if the dollar price is unchanged. For a country like Japan, which imports much of its energy, a weak yen against a strong dollar raises costs and inflation.
Large US multinational companies can be hurt too. They earn a lot of their revenue abroad, and when those foreign earnings are converted back into a strong dollar, they are worth less. That can weigh on reported profits.
Who it can help
Exporters outside the US can benefit, because their goods become cheaper for American buyers. European and Japanese exporters often see some boost when their currencies weaken against the dollar. Foreign companies that earn revenue in dollars but report in their home currency, including many in the FTSE 100, can see their profits lifted in local terms.
American consumers and importers also benefit, as foreign goods and holidays abroad become cheaper.
Effects on other markets
A strong dollar often weighs on commodity prices in dollar terms, including gold, because they become more expensive for buyers using other currencies. It can tighten financial conditions globally, since so much international trade and borrowing is in dollars. And it can put pressure on other central banks, which may need to keep interest rates higher to stop their currencies falling too far.
Why it matters for UK traders
For UK traders, a strong dollar usually shows up as a weaker pound against the dollar. That can push up the cost of imports and fuel, adding to inflation. At the same time, the FTSE 100 has many companies that earn in dollars, so a weaker pound can support the index. Our guide to how sterling reacts to US rate repricing explains the link with interest rates.
The bottom line
A strong dollar is good news for some and bad news for others. It hurts dollar borrowers, commodity importers and US multinationals, while helping exporters elsewhere and UK-listed companies with dollar earnings. Knowing which side of that line a market sits on can help you make sense of big currency moves. If you want to understand how you handle cross-market thinking, take the free Samuel & Co Trading trader assessment.
