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Movements in another financial market have far-reaching consequences for the global economy
The Dow Jones Industrial Average (DJI), S&P 500 (GSPC) and Nasdaq Composite (IXIC) all rallied off their lowest levels of the day to finish above their lowest close of the year in June. Despite the small rebound, indices were down 1.5% to 2%.
Not only have major foreign currencies lost significant value versus the U.S. Dollar, but the rate at which they have done so has been practically unprecedented. Consider the following recent moves:
-The Japanese Yen has also been under pressure recently, with the Dollar recently fetching 146 Yen, its highest level since 1998. The current decline has been so extreme that the Japanese Central Bank interfered in the foreign currency market for the first time in 24 years to try to limit the rate of decline.
-The Euro plummeted 1.5% today alone, falling below $0.97 and reaching levels not seen in almost 20 years.
-The British Pound fell even further, falling 3.5% to $1.085. That was the greatest daily shift since the beginning of the COVID-19 pandemic in early 2020, and the Pound was the worst it has been against the Dollar since the mid-1980s.
-Other currencies are especially weak as well. The Canadian Dollar fell to 73.58 U.S. cents, while the Australian Dollar increased to 65.3 U.S. cents. The Swiss Franc fell marginally to $1.02, with the Dollar threatening to break parity.
The explanation is straightforward. With the Federal Reserve raising interest rates, investors in U.S. Dollar-denominated instruments such as Bonds should expect to earn relatively high returns. As a result, overseas investors convert their foreign currency to U.S. Dollars to acquire such assets, increasing the Dollar's value relative to other currencies.
A strong Dollar is good news for U.S. firms that rely on importing raw materials before selling completed goods to U.S. customers. Better exchange rates lower their import expenses and increase their profits.
Unfortunately, the opposite is true for U.S. corporations with large international activities. Revenue generated by a multinational from a country with a weak currency converts into less U.S. Dollars, impacting on sales growth and profitability. Philip Morris International (PM), for example, is almost totally dependent on non-U.S. customers, funding for its overseas tobacco operations.
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