Issue #147: This is your sign to take a European vacation

June 15, 2022 • Issue #147

Hi y’all —

Earlier this month, I flew to Berlin for a weeklong vacation with friends. We had an amazing time, drinking Radlers on public transit, dancing in techno clubs, visiting historic sites, eating late-night döner kebabs and appreciating the incredible street art that covers every surface in the city. It was ridiculously fun — and fortuitously timed, given the current economic situation.

Let me be clear: I spent a lot of money in Berlin (those ampelmännchen souvenirs weren’t going to buy themselves, you know). But when I was paying the cashier at the local späti, forking over Euros for beers, I began to truly think about the value of my U.S. dollars.

Though I’d heard economists vaguely refer to the ~strength of the dollar~ in the past, it always seemed like an abstract concept. I’d never actually experienced it for myself. Now that I’m back on American soil, I’m ready to investigate.

What does it mean when people say the dollar is strong? What’s happening right now, and how does it affect consumers like me?

I called Robert Barbera, the director of the Center for Financial Economics at Johns Hopkins University, to get a layman’s explanation. Barbera says that what I encountered in Berlin had to do with the bilateral exchange rate, or the rate at which I can swap one currency for another.

Say I want to buy a BMW. (A girl can dream, right?) It was manufactured in Germany, got shipped to the U.S. and costs 50,000 Euros. If, at the moment I’m purchasing the car, the exchange rate is 1:1, $1 buys €1. I can go to the bank, swap $50,000 for €50,000 and purchase my car.

But say the dollar is "strong," which means it’s appreciating in value like it is right now (more on that later). If the dollar is up by, say, 20%, I’ll be able to get 1.20 Euros for $1. So when I buy my BMW, it’s effectively at a discount — even though the sticker price hasn’t changed.

Basically, “when the dollar goes up, it means stuff we buy from the rest of the world gets cheaper,” Barbera says.

On Monday, the U.S. Dollar Index, which compares the dollar to a basket of six foreign currencies, passed 105 — the highest it’s been in roughly 20 years.

This appreciation is likely due to America's record-setting inflation... and the Federal Reserve's decision to hike interest rates as a means of controlling it.

It’s a chain reaction. When the Fed increases rates, the yields on U.S. Treasury bonds — a type of investment in government debt — also rise. And when “suddenly the rest of the world realizes they can get 3% on a U.S. Treasury and they can't even get 1% on most European treasuries,” Barbera says, they flock to buy U.S. dollars.

The surging demand for dollars makes them more valuable. This results in a sweet deal for vacationing Americans, according to Toby Mathis, a tax attorney in Las Vegas. They may think “hey, I love that strong U.S. dollar because anything I buy is on sale,” he adds. 

(See: me in Berlin.)

It's not just that stuff purchased abroad is cheaper. Items being imported into the U.S. are less expensive, too. Take Walmart, for example, where an estimated 80% of items are made in China. When the dollar price for imports goes down, Walmart is able to buy more Chinese products. Then it could — theoretically — to pass those savings along to shoppers like me.

There is a downside, though.

As imports benefit from the strong dollar, exports tend to struggle. The trade deficit worsens, and American companies that do a lot of business in foreign countries often take an earnings hit. As a result, firms like Tesla — which gets about a quarter of all its sales from China — might shift their strategies. They could eventually opt to produce fewer products stateside and cause a ripple effect for the Americans who work in those factories.

But I may be getting ahead of myself. Barbera tells me that, so far, the dollar's uptick isn't too unusual.

However, if the Fed continues to aggressively tighten rates over the next six months, the U.S. could see a dramatic appreciation reminiscent of what happened in the ‘80s and ‘90s, he says. Which could be serious.

“Those were the two big jumps for the dollar, and they did have implications for our trade deficit, our inflation rate, and what happened to our assets versus the rest of the world’s assets,” he adds. “I’m not saying that will happen, but we’re in a position right now where it’s worth contemplating.”

THE BOTTOM LINE

(but please don't tell me you scrolled past all of my hard work)

The ~strength of the dollar~ refers to its value relative to other currencies. The dollar is currently appreciating because of the Fed’s attempt to curb inflation, making imports cheap and exports costly.

Big corporations that rely on sales in foreign countries for a lot of revenue may be worried, but a strong dollar is good for American consumers shopping and taking trips abroad.

VIA GIPHY

RECEIPT OF THE WEEK

check out this wild celebrity purchase

VIA INSTAGRAM

Dwayne “The Rock” Johnson just surprised his mom by buying her a $3.5 million mansion in California. It’s the third house the wrestler/actor has purchased for her, writing in an Instagram caption accompanying a video of the reveal that “when I was a little boy, I hated when my mom would cry ~ these days, I’ll happily take her tears of joy.”

INTERNET GOLD

five things I'm loving online right now

1	A Welsh man recently broke the Guinness World Record for the most pubs visited in 24 hours, ducking into 56 bars in Cardiff. In an interesting twist, though, he didn’t down a beer in each pub. The Guinness rules only require a person to buy and consume a drink, with no restrictions on what that drink actually is. In fact, the primary poison Gareth Murphy picked was orange juice. Feels like a missed opportunity for a TUMS sponsorship.
2	Is sweet tea ice cream the best or worst idea I’ve ever heard? Only one way to find out…
3	As the world waits for news on the 1989 rerecord, Swifties are getting restless. This fan created eight different Taylor Swift Sims, put them in the same house and slowly took away their essentials to see which one would survive the longest.
4	Casper, a Samoyed (dog), and Romeo, a Himalayan Persian boss (cat), are best friends who go on adventures in New Zealand. And now it appears they are defying science by morphing into one?!
5	If you haven’t watched Bo Burnham’s inside outtakes, rectify that immediately. I’m particularly impressed by the Drake parody where he rhymes “dim sum” with “gotten some.”

401(K)ITTY CONTRIBUTION

send me cute pictures of your pets, please

VIA LINDA GOLDSTEIN

Meet Pololo. Pololo’s eyes are so wide because she is thinking about all the stuff she can buy with the strong U.S. pawllar.

See you next week.
 

 
P.S. Has the strength of the dollar impacted your life? Would you try sweet tea ice cream? What does your dream home look like? Help me make cents of it all at julia@money.com or @SuperJulia on Twitter.

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