Dollar rises to 20-year high amid recession fears

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Dollar rises to 20-year high amid recession fears

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

As the Federal Reserve hikes interest rates at the fastest pace since 1994 in order to curb white-hot inflation, investors flee toward the dollar because of risk aversion due to growing fears about a global recession.

The Fed policymakers have approved five straight interest rate increases, including three back-to-back 75 basis-point hikes, and expressed their resolve to keep tightening policy until there is evidence that inflation has cooled.

The world's reserve currency has climbed 7% so far 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.

For the first time in two decades, the euro and dollar achieved parity over the summer, meaning that the currencies have a 1: 1 exchange rate. 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 as well as a number of other foreign currencies, including the British pound.

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

Jeffrey Roach, chief economist at LPL Financial, said the strong U.S. dollar will be a tailwind for GDP growth in the third quarter. The global economy will go into the winter months as the 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 headquarters in the U.S. have said that the dollar is hurting their profits.

We had a great quarter but the dollar had an even stronger quarter, according to Marc Benioff, Salesforce CEO, during a recent earnings call.

The San Francisco-based company that sells software across the globe has estimated that 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.