Why the dollar matters even if you don't own any
Most of world trade is invoiced in dollars, so its strength touches prices far beyond America.
The invoicing currency
Oil, gas, copper, wheat and most of international trade are priced in dollars, even when neither the buyer nor the seller is American.
So a stronger dollar makes oil more expensive in euros, even if the dollar price has not moved at all.
That is the first channel through which a Federal Reserve decision changes the energy bill of a family in Europe.
Dollar debt
Many governments and companies in emerging economies borrow in dollars because it comes cheaper. But their income is in the local currency.
When the dollar strengthens, that debt gets heavier without a single cent being added. It is the reason that repeats itself across emerging market crises.
So a tightening cycle in Washington brings trouble to countries that have nothing to do with the American economy.
What moves the dollar itself
The main factor is interest rates relative to each other. If American rates rise and European ones do not, money flows towards the higher return and the dollar strengthens.
The second factor is fear. In a crisis, investors flee to the assets they consider safest, and that means American bonds — in other words, dollars.
That is why the dollar often strengthens precisely when the news is bad everywhere, even in America itself.
Key terms in this lesson
- Reserve currency
- A currency held by central banks and used to invoice world trade.
- Exchange rate
- What one currency is worth, expressed in another.
- Safe haven
- An asset money flees to when fear rises, like American bonds or gold.
Quick check
The dollar price of oil does not change, but the dollar strengthens by 10%. What happens to the bill in euros?
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