A long time ago … way back in the fall of 2021, I received an email from a brilliant Bitcoin investor, which went something like this:
Jill, you are skeptical of crypto and thankfully, I ignored your bad advice to limit my allocation to five percent of my investments. I
Made a ton of money and you (and other boomer finance folks) don’t think bitcoin is the currency of the future. Get on the Crypto Express or you’ll be stuck at the station.
There were many explanations that I omitted from this note, but you get it.
I discussed crypto a lot during 2021, as it soared in value, and my premise was simple: it’s fine to dabble in a new (and volatile) asset class, but be clear that more general investments Unlike decisions that can be justified by corporate earnings, cash flow, the general economy and interest rates, a bet on crypto was just that – a bet.
As for Bitcoin and other crypto-assets becoming the means by which the world does business, well, that hasn’t happened yet.
In fact, as I write this the US dollar is the strongest it’s been in 20 years, while crypto has been crushed — bitcoin has halved in 2022, though admittedly, it launched in 2009. Still up a ton since.
You may be wondering what is behind the dollar’s renewed fortunes. The answer may be the result of another major trend in 2022: rising interest rates.
Standard economic theory says that when the Federal Reserve raises short-term rates faster than other central banks around the world, the value of the dollar increases. This is because higher interest rates make returns on savings more attractive than in other countries.
Then as capital flows into America from around the world, the dollar rises even more. Some economists doubt this correlation effect, but I’ll let the PhDs quibble over the mechanism. For today, let’s explore what a rising dollar means for the economy and for you.
The winners of the strong dollar start with American tourists, who are traveling abroad. When the U.S. dollar appreciates against foreign currencies, Americans get more bang for their buck when they’re in London, Paris, or Japan.
A couple from Chicago may also find that after factoring in the exchange rate, the fear of inflation at home isn’t so bad. As a result, they can splurge for a new handbag, belt, or shoes. Those purchases can boost the bottom line of sellers of these types of goods. A stronger dollar could also help ease the pain at the pump, as crude is priced in dollars.
But with every winner there is a loser. In the case of a strong dollar, countries that have a lot of debt denominated in dollars (which is much of the developing world, including large countries like Argentina and Turkey), the cost of servicing that debt increases. The dollar rises. And because oil is a global commodity, the price of a liter of gas in Berlin, Brittany, or Barcelona is made even more expensive by the rise of the dollar.
Finally, there is the problem of the American company doing too much business overseas. A stronger greenback makes everything from an iPhone to a Microsoft software package to a Costco store product less compelling than a local brand that’s now cheaper, because of the exchange rate. US multinationals could see margins shrink, which could eat into profits and cause their stock prices to fall.
Jill Schlesinger, CFP, is a business analyst for CBS News. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at askjill@jillonmoney.com. Check out his website at www.jillonmoney.com.
