10 Major Impacts When USD Strengthens on the Global Economy

The US dollar can be considered the global reserve currency as it can be easily traded in most countries. This greenback can be used to price basic goods, chosen by nations as a foreign exchange reserve, and is often seen as a safe haven by investors when the economic market is unstable. Below are 10 significant impacts when the USD appreciates on the global economy that you should be aware of.

10 Major Impacts When the USD Appreciates on the Global Economy

In recent months, the USD has seen a strong appreciation due to escalating inflation and the expectation that the Federal Reserve (FED) – the US central bank – will continue to raise interest rates higher than other central banks. When the USD appreciates, it has various effects on the global economy and the United States itself, including 10 major impacts such as:

Impact of USD Appreciation on US Manufacturing Goods

When the USD appreciates, it has a negative impact on US manufacturing companies because the prices of their products increase, leading to reduced consumer demand and decreased sales and profits for these companies.

For example, companies like Mattel, known for producing Barbie dolls, Hot Wheels toy cars, and Pampers, or P&G, are affected.

Impact of USD Appreciation on Americans Traveling Abroad

For Americans traveling abroad, the impact of USD appreciation is generally positive. This is because when the USD appreciates, the costs of services such as dining, hotel reservations, and shopping overseas become cheaper. This allows American citizens to travel abroad at a lower cost.

However, for foreigners traveling to the United States, it’s a different story as they will have to spend more for the same services they use.

Impact of USD Appreciation on Bitcoin

Bitcoin was created with the purpose of becoming a “inflation-resistant asset” due to its limited supply of 21 million BTC. However, the appreciation of the USD has caused Bitcoin to depreciate because investors view USD as a more effective risk hedge asset. In just over 8 months from November 2021, the price of Bitcoin has dropped from $69,000 to just over $20,000 (a nearly 70% decrease), indicating that Bitcoin is a highly risky currency.

Many Bitcoin investors have shifted from holding Bitcoin to holding USD due to high inflation and rising interest rates.

Impact of USD Appreciation on Countries Dependent on Importing Raw Materials

The impact of USD appreciation on countries that heavily import raw materials is highly negative. This is because when the world’s basic commodities are mainly priced in USD, it drives up the prices of raw materials, causing these countries to spend more money to meet their domestic production needs.

Countries heavily impacted by USD appreciation, such as Egypt and Turkey, which have to import oil, wheat, and other products.

Impact of USD Appreciation on Countries Receiving Large Remittances

For countries that receive a significant amount of remittances in USD, the impact of USD appreciation is quite positive. After the COVID-19 pandemic emerged and began spreading rapidly in 2020, remittances declined significantly. However, when the USD appreciates, remittances to these countries increase again. Countries that receive a significant amount of remittances from the US include Guatemala and Mexico.

Impact of USD Appreciation on the Euro (EUR)

When the US dollar appreciates to a level close to the euro, there are both positive and negative effects. Positively, the prices of EU goods become more competitive compared to US goods, and European manufacturing companies may benefit more. Negatively, Europeans traveling to the US or using American products will have to spend more on shopping and consumption.

Impact of USD Appreciation on the Russian Ruble (RUB)

After the outbreak of the Russia-Ukraine war, the Russian ruble saw significant depreciation due to economic sanctions from the West. However, it has been one of the few currencies in the world that has moved in the opposite direction to the global trend along with the USD. To achieve this, the Russian government had to implement capital controls, ban cryptocurrency payments, and only accept payments in rubles, which helped restore the currency’s position.
Additionally, the Russian Ruble (RUB) also benefits as Russia earns tens of billions of USD from selling energy and natural gas to the West every month.

To strengthen its Ruble after the outbreak of the war with Ukraine, Russia doubled its interest rates to 20%. However, this move also posed the risk of economic recession for the Russian economy. Consequently, the Central Bank of Russia (CBR) had to reduce interest rates by 1.5 percentage points to 8%.

Impact of USD Appreciation on Emerging Economies

The USD’s appreciation has had negative effects on emerging economies. For instance, in Argentina, after a significant USD appreciation against the Peso, the cost of living for Argentinians doubled within the past year, leading to a widespread economic crisis.

The reason is that governments and businesses in emerging economies often issue USD-denominated bonds to raise capital. When the greenback appreciates, the debt of these countries in their local currency increases, making it more difficult to mobilize domestic capital.

Impact of USD Appreciation on Inflation

USD appreciation has led to increased inflation in many parts of the world, even though it was already high. When the US dollar rises, it pushes up the prices of imported goods, causing central banks in many countries to raise interest rates and tighten the money supply, potentially leading to economic recession.

Impact of USD Appreciation on the Big Mac Index

The Big Mac Index is an indicator reflecting the price of a Big Mac hamburger from McDonald’s worldwide, published by The Economist magazine. According to this index, the USD is currently overvalued and may soon decrease in value. According to this index, the most expensive Big Macs are in Romania, Indonesia, and Venezuela, while the cheapest ones are in Switzerland, Uruguay, and Norway.

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• What Is the FED? How Does FED Rate Hike Affect?

These are the impacts of the US dollar (USD) appreciation on the global economy that can be easily observed. In general, USD appreciation has both positive and negative aspects. Therefore, controlling the USD is necessary for the United States to help the economy grow and avoid future recessions.