With the value of the dollar increasing, it’s on the way to being worth the same as the euro for the first time in 13 years. This has been a good year for the dollar, as it’s been surging not only against the euro, but most other global currencies as well. The US Dollar Index, which measures the dollar versus the euro, yen, pound, Canadian dollar, krona and franc, is nearly up 10% so far in 2015. This is mainly due to improving economic conditions in the US when compared to Europe and Japan.
Due to this rise, the Federal Reserve will most likely hike interest rates, even as the European Central Bank and many other global central banks have been cutting their rates. The dollar picked up even more last Friday after a solid US jobs report boosted the likelihood that the Fed could raise rates next month.
The euro is currently worth about $1.07, so there’s still a ways to go before it reaches $1 on the nose. Nonetheless, a year ago the euro was worth about $1.24. While this plunge of value for the euro has been impressive, it doesn’t seem to be over just yet. According to Greg Valliere, the chief global strategist with Horizon Investments, the Fed could need to raise rates several times next year if the unemployment rate keeps falling. While Boris Schlossberg, the managing director of foreign exchange strategy for BK Asset Management, said that thinking the euro and dollar would reach parity in the near future would be “premature”, he did admit that momentum has been favoring the dollar.
The high value of the dollar means that imported goods will be cheaper in the US, and is advantageous to Americans traveling abroad as well. However, a strong dollar isn’t as good for large corporations with a large international presence or US firms that benefit when foreign travelers come to America. Look, for example, at online travel agency Priceline, where on Monday shares fell nearly 10% after the company issued an earnings outlook below forecasts. The might of the dollar could also end up hurting Coca-Cola, IBM, Caterpillar and Procter & Gamble.
While many economists and Wall Street strategists now think that a rate hike is more and more likely at the Fed’s next meeting in December, investors would be ill-advised to ignore the role that the dollar could play in the decision. The Federal Government has also been noting that net exports have been lowering in every statement since June, meaning that a strong dollar is hurting Corporate America. An eventual rate hike should boost the dollar even further, especially if foreign banks continue to cut their rates. If you’d like to learn more about the value of the dollar, then click here!