This Week’s Blogger: Scott D. Heins, CFP®, IAG Chief Investment Officer
One of the more interesting stories of 2022 has been the dichotomies of the U.S. dollar. When you think about them from just the wrong perspectives it can give you a headache. Naturally, that is where my attention is drawn.
Everybody in the United States knows that inflation has run amok over the last 12 months. According to the Bureau of Labor Statistics, year-over-year inflation in October was 7.7%. Thankfully, this continued a downtrend after year-over-year inflation peaked at 9.2% in June.
The impact on consumers is tangible. If you spent $100 on the basket of goods that make up the Consumer Price Index in October 2021, that basket of goods would cost you $107.70 in October 2022.
The conclusion is simple – a dollar is worth less because it has lost significant purchasing power.
While this “worth less” dollar is frustrating for consumers, it can be a benefit for people who are in dollar-denominated debt. Hypothetically, let’s assume your country has managed to compile $30,000,000,000,000 in debt. These dollars are owed to both domestic and foreign debt owners when the debt matures at some point in the future.
If you are able to reduce the value of the dollars you must repay by 7.7%, suddenly your $30,000,000,000,000 dollar debt only feels like $27,690,000,000,000 because the dollars you will be repaying in the future are worth less. If you happen to find yourself in debt, inflation is not all bad.
Now let’s double our dollar dichotomy.
With the dollar persistently worth less, why do currency traders believe the dollar is worth more?
One year ago, it took $1.13 to buy a euro. Today it only takes $1.05 to buy a euro. A dollar is clearly worth more today than it was one year ago because it can buy a euro for fewer dollars.
A stronger dollar acts as a deflationary force because it takes fewer dollars to purchase foreign-produced goods and services. And the United States imports a lot of goods (especially for this time of the year).
Currency trading is based almost entirely on relativity. While the United States is struggling with inflation, other countries are struggling with INFLATION. Additionally, the Federal Reserve was one of the first central banks to begin raising interest rates which supports the value of the dollar.
Thus, on a relative basis, the U.S. dollar is still one of the cleanest shirts in the dirty clothes hamper of currencies.
The dollar double dichotomy of 2022 can be summed up as follows: a dollar that currency traders believe is worth more is actually worth less which is bad for consumers while potentially benefiting those in debt.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
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Quote of the week:
Anonymous: “The real measure of your wealth is how much you’d be worth if you lost all of your money.”
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