Imagine you just got back from that romantic Parisian vacation you fantasized about forever. The trip was a dream come true, but you notice something odd when you check your credit card statement. The cab ride from Charles de Gaulle Airport, those Eiffel Tower souvenirs, and that extra buttery croissant all cost more than you thought.
People say that money doesn’t go as far as it used to—and that may be true, but this is not simple inflation or Parisian price gouging. Your cash appears to have less value compared to the euro than it did just a few months ago when you planned your getaway.
Americans often first encounter the strength or weakness of the dollar when traveling internationally. In the case of your European vacation, a weaker dollar is why everything cost more than originally anticipated.
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 continue to strengthen.
A strengthening dollar can help fight against inflation since a strong dollar helps naturally slow down a US economy that may be growing too fast. In addition to cutting the cost of your next trip outside the US, investors in US bonds will earn higher yields when the greenback is strong. Goods produced abroad coming into the US end up costing less for domestic consumers.