Strong Dollar: Cheap Travel But Tricky for Trade

On paper, a strong U.S. dollar sounds great. It makes vacations cheaper for Americans, for example, and who doesn’t like that?

But the strong greenback can also be a major headwind for financial markets and international trade, weighing on the global economy. Here’s what’s going on.

Bills, bills, bills

Inflation is hitting manufacturers around the world. Input costs — that’s the cost of materials and parts – keep going up. In May, the rate of input price inflation hit a 15-month high, according to S&P Global . And the unfavorable exchange rate plays a role.

For example, the Korean won has declined more than 6% against the dollar this year, driving up the cost of South Korea’s imported raw materials and weighing on its economic output. Meanwhile, the Japanese yen hit a three-decade low against the dollar in April, which is why you hear everyone talking about a Tokyo trip.

What does this look like stateside? For one, the U.S. trade deficit jumped to an 18-month high. A strong economy with healthy spending paired with a strong currency means foreign goods are cheaper to buy and there’s a lot of appetite for them. This goes for consumer products as well as raw materials and parts.

Market Pressure

For America’s exporters, meanwhile, things aren’t as peachy. American products are more expensive to buy, making them less competitive on the global market when the dollar is this strong.

The longer the greenback stays this strong, the more global trade will have to adapt, which could result in even more pain for certain manufacturers.

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