A stronger dollar means it can purchase more of a foreign currency than before, while a weaker dollar means the opposite.
The British pound on Monday slid into a record low against the dollar, reaching $1.03 before bouncing back slightly. The pound has historically averaged upwards of $1.20 against the dollar.
The dollar is rising primarily because the U.S. has a stronger economy than other nations. Despite high domestic inflation, the American job market remains strong, as does consumer spending in the economy.
American consumers are impacted by a rising and falling dollar, but the effects of the currency fluctuations permeate throughout the globe and the international financial system.
Those who benefit from a stronger dollar include American tourists and U.S. consumers at home.
A stronger dollar means goods and services produced in other countries and sold in the U.S. are less expensive.
International businesses and producers, for example, make more money with a strengthened dollar because they pocket more on each U.S. sale, meaning they can keep prices for American consumers the same or even cut prices.
Tourists abroad are also spending less money per purchase in foreign countries because the dollar has a stronger buying power.
A stronger dollar also helps U.S. companies who import goods because they are paying less for those products.
However, a stronger dollar means there are also some who are hurt by the strengthening currency.
Multinational companies and American businesses who export goods have struggled this year with the strengthening dollar.
With a stronger dollar, foreign businesses and producers may increase imports and curb exports, potentially hindering American firms’ ability to compete, while large international companies that make revenue in other countries and convert into the U.S. dollar are especially hurt.
Earlier this year, Microsoft cut its revenue and profit forecast because of the strong dollar, the Financial Times reported.
Emerging economies across the world are also likely to be negatively impacted because international companies borrow and trade money in U.S. dollars. And imports into their country are also usually more expensive.
The stock market, which has taken a beating this year, may also be affected.
Liz Sonders, a chief investment strategist at Charles Schwab, tweeted that a rapidly strengthening dollar has “historically coincided with weaker growth” in the S&P 500, the main index used to measure the health of the U.S. stock market.