While Wall Street has been focused on trade talks and diplomatic tensions over the summer, the U.S. dollar has quietly crept to its highest levels of the year.
The DXY U.S. dollar index, which measures the greenback against a basket of currencies, has surged since April lows to hold year-to-date highs through July.
- A stronger U.S. economy relative to international economies has contributed to the dollar rally, while trade tariff rhetoric has pushed investors to seek out the currency as a safe haven asset.
- The U.S. trade deficit will likely rise as consumers take advantage of a strong dollar to buy an increased amount of overseas goods and services.
- Emerging markets will continue to feel pressure as it becomes more expensive in a local currency to purchase dollar-based commodities and debt.
- U.S. multinationals will also get squeezed. Companies that generate revenues overseas have to convert international sales back into U.S. dollars, reducing the overall amount.
- Longer term, the dollar should move lower than where it is today, due to the large U.S. trade deficit and mean reversion of international interest rates and economic growth.
- In the short term, the continued strength in the dollar could persist.
Bottom line: The U.S. dollar’s rally is going to bring more pain to emerging markets and U.S. multinational companies.