That trip to Paris you took a few years back was fun, except for the sticker shock you experienced after checking your credit-card statements back home. Like many Americans traveling abroad a few years ago, you were dismayed to discover that a strong euro made paying for all those souvenirs, wine bottles, and buttery croissants seem a lot more expensive.
But, as any experienced traveler knows, foreign-exchange rates can work in reverse. When the dollar is strong and the euro is weak, it’s the American tourists enjoying the bargains while French visitors are paying more for their Statue of Liberty souvenirs.
Americans often first encounter the strength or weakness of the dollar when traveling internationally. The factors involved in how a dollar grows stronger or weaker can vary. However, the one constant is that the dollar follows a cyclical pattern of rising and falling. This cycle impacts you a lot more than how much that café stop at the Louvre cost.
What a Strong Dollar Means
When the Federal Reserve (Fed) takes action to send interest rates up, the dollar’s value usually strengthens. It can buy more of another currency than it could previously. As the Fed continues to normalize rates, the dollar will likely continue to strengthen.
A strengthening dollar can help fight inflation since it can help slow down a US economy that may be growing too fast while goods produced abroad coming into the US end up costing less for domestic consumers. A stronger dollar may also cut the cost of your next trip outside the US. In addition, foreign investors in US bonds will earn higher yields when the greenback is strong, increasing demand for US debt and helping lower overall yields in the US.