- [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)