A long, long time ago … way back in the fall of 2021, I received an email from a gloating Bitcoin investor, which went something like this:
Jill, you have been a crypto doubter and thankfully, I ignored your BAD advice to limit my allocation to five percent of my investments. I
have made a ton of money and you (and other Boomer finance people) don’t understand that Bitcoin is the currency of the future. Get aboard the Crypto Express or you will be left stranded at the station.
There were a bunch of expletives that I omitted from this note, but you get the drift.
I had discussed crypto a lot throughout 2021, as its value soared and my premise was simple: It’s fine to nibble at a new (and volatile) asset class, but be clear that unlike more common investing decisions that can be quantified by corporate earnings, cash flows, the general economy and interest rates, a bet on crypto was just that – a bet.
As far as bitcoin and other crypto assets morphing into the means through which the world conducts business, well, so far, that has not happened.
In fact, as I write this the U.S. dollar is the strongest it’s been in 20 years, while crypto has been crushed — Bitcoin is down by half in 2022, though admittedly, it is still up a ton since its launch in 2009.
You may be wondering what’s behind the dollar’s renewed fortunes. The answer may be a result of the other big trend of 2022: rising interest rates.
Standard economic theory posits that when the Federal Reserve raises short-term rates more quickly and by more than other central banks around the world, the dollar rises in value. The reason is that higher interest rates make the return on savings more attractive in the U.S. than in other countries.
Then as capital from around the world flows into the U.S., the dollar rises even more. Some economists doubt this linked effect, but I’ll let the PhDs quibble over the mechanism. For today, let’s figure out what the rising dollar means for the economy and for you.
The winners of a strong dollar start with American tourists, who are traveling abroad. When the U.S. dollar rises in value compared to foreign currencies, Americans get more bang for their buck when they are in London, Paris, or Japan.
The couple from Chicago may even feel like the inflation fears they faced at home aren’t so bad, after factoring in the exchange rate. As a result, they may splurge for a new handbag, belt, or shoes. Those purchases may boost the bottom line of sellers of those types of goods. The stronger dollar may also help ease the pain at the pump, because crude oil is priced in dollars.
But with every winner, there is also a loser. In the case of a strong dollar, countries that have a lot of debt that is denominated in dollars (which is much of the developing world, including big countries like Argentina and Turkey), the cost of servicing that debt rises as the value of the dollar increases. And since oil is a global commodity, the cost of a liter of gas in Berlin, Brittany, or Barcelona, just got even more expensive with the dollar’s surge.
Finally, there’s the problem of the U.S. company that does a lot of business abroad. A strong greenback makes everything from an iPhone to a Microsoft software package to Costco store products less compelling when compared to a local brand that is now cheaper, due to the exchange rate. U.S. multinationals could see margins compressed, which could eat into profits and cause their stock prices to drop.
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check her website at www.jillonmoney.com.
Source: www.mercurynews.com