Soaring dollar risks widening US trade deficit

[divider style=”solid” top=”25″ bottom=”25″][dropcap]F[/dropcap]or the first time in over two decades the exchange rate between the US Dollar and the Euro has hit parity meaning that the two currencies are worth the same amount.

The dollar is the world’s reserve currency, which means it is used in most international transactions.

It has gained 15% against the British pound, 16% against the euro and 23% against the Japanese yen. However, the Dollar’s soaring strength is a double edge sword. For Americans, this is the best time to travel.

An exchange rate of $1.02 against the Euro for instance means that it will cost Americans $102 to obtain 100 euros versus $118 a year ago. This enhanced spending power has real ramifications for Americans when they leave the country and start spending on food, hotels, tours, and souvenirs. A year ago, a 30 euro meal cost about $35 dollars, vs $31 today. Going back to 2008, a meal at the same price cost $47.

It will be much easier for an American to travel to Africa where currencies continue to weaken against the Dollar. In Kenya for example the dollar is exchanging at  114 Kenya Shillings compared to 80 Kenya Shillings some 5 years ago.

In a nutshell Americans will have great spending power now than ever before.

On the flipside, the US is likely to experience a bigger trade deficit as countries shy away from buying their products.

For an importer, the surge in the dollar against the euro, yen or British pound is a plus, because it makes the products they buy cheaper.

But for a U.S. export company, products sold in dollars have become more expensive, which increases the risk of losing clients and seeing sales decline.

“Short term, that’s a good thing for the United States because it means all the imports are cheaper and it puts downward pressure on inflation,” said Desmond Lachman of the American Enterprise Institute think tank.

Multinational companies based in North America but relying on revenue from overseas will be hard hit says Wolfgang Koester, Chief Evangelist of Kyriba a corporate cash management platform.

“Corporate risk managers face a difficult challenge as inflation and currency volatility are increasing due to the myriad issues impacting global markets. We are seeing a doubling or tripling of their portfolio currency risk and the cost of hedging is also increasing.”

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