The U.S. Federal Reserve may start\u00a0cutting interest rates\u00a0before year\u2019s end. That could make future trips abroad\u00a0more expensive\u00a0for the nation\u2019s travelers.<\/p>\n
That\u2019s due to how interest-rate policy affects the strength of the U.S. dollar.<\/p>\n
Here\u2019s the basic idea: An environment of rising U.S. interest rates relative to those in other nations is generally \u201cdollar positive,\u201d said Jonathan Petersen, senior markets economist and foreign exchange specialist at Capital Economics.<\/p>\n
In other words, rising rates underpin a stronger U.S. dollar versus foreign currencies. Americans can buy more stuff with their money overseas.<\/p>\n
The opposite dynamic \u2014 falling interest rates \u2014 tends to be \u201cdollar negative,\u201d Petersen said. A weaker dollar means Americans can buy less abroad.<\/p>\n
Fed officials in June signaled they\u00a0expect to cut rates\u00a0once in 2024 and four additional times in 2025.<\/p>\n
\u201cOur expectation for now is the dollar will come under more pressure next year,\u201d Petersen said.<\/p>\n
However, that\u2019s not necessarily a foregone conclusion. Some financial experts think the dollar\u2019s strength may have staying power.<\/p>\n
\u201cThere have been quite a few headlines calling for the U.S. dollar\u2019s demise,\u201d Richard Madigan, chief investment officer at J.P. Morgan Private Bank,\u00a0wrote\u00a0in a recent note. \u201cI continue to believe the dollar remains the one-eyed man in the land of the blind.\u201d<\/p>\n
The Fed\u00a0started raising\u00a0interest rates aggressively in March 2022 to tame high pandemic-era inflation. By July 2023, the central bank had raised rates to their\u00a0highest level\u00a0in 23 years.<\/p>\n
The dollar\u2019s strength surged against that backdrop.<\/p>\n
The\u00a0Nominal Broad U.S. Dollar Index\u00a0is higher than at any pre-pandemic point dating to at least 2006, when the central bank started tracking such data. The index gauges the dollar\u2019s appreciation relative to currencies of the nation\u2019s main trading partners such as the\u00a0euro, the Canadian dollar and the\u00a0Japanese yen.<\/p>\n
For example, in July 2022, the U.S. dollar\u00a0reached parity\u00a0with the euro for the first time in 20 years, meaning they had a 1:1 exchange rate. (The euro has since rebounded a bit.)<\/p>\n
In early July, the U.S. dollar hit its\u00a0strongest level\u00a0against the yen in 38 years.<\/p>\n
A strong U.S. dollar gives \u201ca discount on everything you\u2019re purchasing while you\u2019re abroad,\u201d Petersen said.<\/p>\n
\u201cIn a sense, it\u2019s never been cheaper to go to Japan,\u201d he added.<\/p>\n
A record number of Americans\u00a0visited Japan\u00a0in April, according to the Asian nation\u2019s tourism board. Benjamin Atwater, a communications specialist at InsideAsia Tours, a travel agency, attributes that partly to the\u00a0financial incentive\u00a0bestowed by a strong dollar.<\/p>\n
In fact, he personally recently extended a work trip to Japan by a week and a half \u2014 instead of opting to travel elsewhere in Asia \u2014 largely because of the favorable exchange rate.<\/p>\n
Everything from meals, hotels, souvenirs and the rental car were a \u201cgreat value,\u201d said Atwater, who lives in Denver and has long wanted to travel to Japan.<\/p>\n
\u201cIt was always portrayed as one of the most expensive places you can go, [but] I was getting some of best steaks I\u2019ve ever had for like $12,\u201d he said.<\/p>\n
In reality, the dynamics driving dollar fluctuations are more complex than whether the Fed raises or lowers interest rates.<\/p>\n
The differential in U.S. rates versus other nations is what\u2019s significant, economists said. Fed policy doesn\u2019t exist in a vacuum: Other central banks are also simultaneously making interest-rate choices.<\/p>\n
The European Central Bank\u00a0cut interest rates\u00a0in June, for example. Meanwhile, the Fed has kept rates higher for longer than many forecasters anticipated \u2014 meaning the rate differential between the U.S. and Europe has widened, helping support the dollar.<\/p>\n
\u201cThe Fed\u2019s on hold, other central banks are getting ready to ease and the Bank of Japan (BoJ) seems stuck in a moment,\u201d J.P. Morgan\u2019s Madigan wrote.<\/p>\n
\u201cIf Japan wants the yen to stabilize, policy rates need to move higher,\u201d he added. \u201cThat doesn\u2019t appear to be happening anytime soon. With the ECB expected to cut ahead of the Fed, I expect current euro weakness to also prevail.\u201d<\/p>\n
This is happening against the backdrop of a relatively strong U.S. economy, which also generally supports a strong dollar, Petersen said. At a high level, a strong economy means there will generally be higher economic growth and\/or inflation, which means a greater likelihood the Fed will keep interest rates relatively high, he said.<\/p>\n
A strong economy also typically incentivizes foreigners to park more money in the U.S., he said.<\/p>\n
For example, investors generally get a better return on cash when interest rates are high. If an investor in Europe or Asia were getting perhaps 1% or 2% on bank account holdings while such holdings in the U.S. were\u00a0yielding 5%, that investor might shift some money to the U.S., Petersen said.<\/p>\n
Or, an investor might want more to hold more of their portfolio in U.S. rather than European stocks if the economic growth outlook wasn\u2019t good in Europe, he said.<\/p>\n
In such cases, foreigners buy dollar-denominated financial assets. They\u2019d sell their local currency and buy the dollar, a process that ultimately bids up the dollar\u2019s strength, Petersen said.<\/p>\n
Exchange rates \u201call come down to capital flows,\u201d he said.<\/p>\n
While these dynamics also hold true in emerging markets, currency fluctuations can be more volatile than in developed nations due to factors like political shocks and risks to commodity prices like those of oil, he added.<\/p>\n<\/p>\n
The U.S. Federal Reserve may start\u00a0cutting interest rates\u00a0before year\u2019s end. That could make future trips abroad\u00a0more expensive\u00a0for the nation\u2019s travelers. That\u2019s due to how interest-rate policy affects the strength of the U.S. dollar. Here\u2019s the basic idea: An environment of rising U.S. interest rates relative to those in other nations is generally \u201cdollar positive,\u201d said […]<\/p>\n","protected":false},"author":0,"featured_media":6023,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-6022","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-business"],"_links":{"self":[{"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/posts\/6022","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"replies":[{"embeddable":true,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/comments?post=6022"}],"version-history":[{"count":0,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/posts\/6022\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/media\/6023"}],"wp:attachment":[{"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/media?parent=6022"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/categories?post=6022"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/businesstriumphs.com\/index.php\/wp-json\/wp\/v2\/tags?post=6022"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}