Dollar hits 20-year high, but there's a catch

Dollar hits 20-year high, but there's a catch

The American economic outlook is crumbling as the recession fears grow, but there is one bright spot that has accelerated to a new 20 year high this week.

The Fed hikes interest rates at the fastest pace since 1994 in order to curb white-hot inflation, and has sent investors fleeing the greenback as a safe haven of sorts due to the risk aversion due to growing fears of a global recession.

Five straight interest rate increases, including three back-to-back 75 basis-point hikes, have been approved by the Fed policymakers, and they have expressed their resolve to tighten policy until there is evidence that inflation has cooled.

The world's reserve currency has climbed about 7% in the third quarter, after surging 5.7% in the first half of the year.

A mixed bag of pros and cons comes with a strong dollar.

The euro and the dollar achieved parity over the summer, meaning that the currencies have a 1: 1 exchange rate for the first time in two decades. That is good news for Americans traveling to Europe this year because they can expect less money for things like hotel rooms and meals while they are overseas.

The euro has gone up in value to a number of other foreign currencies, including the British pound.

The dollar has helped U.S. importers buy goods from overseas because purchases are less expensive. Gross domestic product will be the broadest measure of goods and services produced in the U.S. in the third quarter.

Jeffrey Roach, chief economist at LPL Financial, said that the strong U.S. dollar will be a tailwind for GDP growth in the third quarter. As the global economy heads into the winter months, a weakness in Europe and Asia will diminish demand for U.S. exports. There are downsides to the dollar's strength: Executives of multinational corporations with their headquarters in the U.S. have said that the muscular dollar is delaying their profits.

The quarter was great, but the dollar had an even stronger quarter, said Marc Benioff, Salesforce CEO, during a recent earnings call.

The San Francisco-based company that sells software around the globe has estimated the dollar could shave $800 million from its sales this year.

Procter Gamble predicted a $900 million after-tax hit in the fiscal year ending June 2023 as a result of the dollar's strength.