If Donald Trump were still in the White House, then all hell would probably break loose in his little world of ideas: For months, the US dollar has been steadily increasing in value against almost all other well-known currencies, and it has fallen below the euro mark for the first time in 20 years from one to one and brings tears to the eyes of visitors to the USA, for example from Germany. It is, as Trump would say, “the envy of the world” – the means of payment that makes the rest of the world green with envy.
You’ve never heard of Joe Biden like this, and there are two reasons for that: First, unlike his predecessor, the incumbent president doesn’t tend to boast. And on the other hand, the Democrat knows that such a strong currency can easily become a boomerang – for the world, but ultimately also for the USA itself.
The reasons for the high dollar demand are manifold. First of all, the US economy and job market are simply in better shape than, for example, Europe, which is also being blackmailed by Russian oil and gas supplier Vladimir Putin. In addition, international investors traditionally like to shift their money into dollars and dollar securities in turbulent times, because the USA is still considered a country that is guaranteed to remain solvent even in the deepest of crises. Most importantly, while the European Central Bank (ECB) has long been blissfully slumbering with the massive rise in inflation rates around the world, the US Federal Reserve has been aggressively raising interest rates for months. The result is that US government bonds are much more attractive to investors than German ones, for example. But if you want to buy US bonds, you need, exactly, dollars.
For Americans, all of this is a beautiful thing. Rarely, for example, has it been so cheap to vacation in Europe. And even US citizens who order goods manufactured abroad are currently experiencing a kind of bargain rush, despite inflation. But this intoxication comes with a hangover guarantee, because the joy of cheap imports has a downside: American companies’ exports are becoming increasingly difficult to sell because the buyers have to pay for the goods in dollars. So with every cent that the dollar appreciates in value, so does the pain of the export industry – and the trade deficit. But not only the exporters, but also US companies producing abroad groan: If Apple sells an iPhone in Germany, for example, the group receives euros for it. However, if he converts the profit into dollars to distribute to shareholders, a significant portion is lost.
Economic slumps, unemployment and new debt crises threaten worldwide
The consequences for citizens, companies and governments in the rest of the world are even more dramatic. Emerging and developing countries have to throw billions in foreign exchange reserves onto the market to protect their national currencies from falling prices and their citizens from recession, unemployment and hyperinflation. In addition, there is a risk of new debt crises because many poorer countries have taken out loans in dollars, the repayment of which is now much more expensive.
But the richer US trading partners in Europe and East Asia are also coming under increasing pressure. Not only do they have to spend far more money on imports from the United States, but also on oil, metals, lumber, and countless other commodities that are traded in dollars. In addition to the immensely high inflation rates at home, they also import inflation from abroad. This increases the risk that the ECB and other central banks will have to raise interest rates even more drastically, thereby stalling the economy. A recession in Europe, possibly in Japan, South Korea or even China, would also throw the US economy into massive turbulence.
Dramatic exchange rate fluctuations are always either the result of government manipulation or – as in this case – a clear indication that the world is in disarray. Contrary to what some simpletons believe, the strength of the dollar is therefore not a reason to celebrate. A return to more normal, better balanced courses would be.