Crypto gets crushed while the dollar rejoices
A long, long time ago… way back in the fall of 2021, I received an email from a happy Bitcoin investor, which went something like this:
Jill, you have been a crypto doubter and thankfully I ignored your BAD advice to limit my allocation to five percent of my investments. I
have made tons of money and you (and other Boomer financiers) don’t understand that Bitcoin is the currency of the future. Board the Crypto Express or you will be stranded at the station.
There were a bunch of statements that I left out of this note, but you get the drift.
I had discussed crypto a lot throughout 2021 as its value rose and my premise was simple: it’s fine to tap into a new (and volatile) asset class, but be clear that unlike more common investment decisions that can be quantified by corporate earnings, cash flows , the general economy and interest rates, a bet on crypto was just that – a bet.
As for bitcoin and other cryptoassets transforming the way the world does business, well, so far, that hasn’t happened.
In fact, as I write this, the US dollar is the strongest it has been in 20 years, while crypto has been crushed – Bitcoin is halved in 2022, but admittedly still up a ton since its launch in 2009.
You may be wondering what lies behind the dollar’s renewed fortunes. The answer may be a result of the other big trend in 2022: rising interest rates.
Standard economic theory suggests that when the Federal Reserve raises short-term interest rates faster and by more than other central banks around the world, the dollar rises in value. The reason is that higher interest rates make the return on savings more attractive in the US than in other countries.
So when capital from around the world flows into the US, the dollar rises even more. Some economists doubt this associated effect, but I’ll let the graduate students argue about the mechanism. For today, let’s find out what the rising dollar means for the economy and for you.
The winners of a strong dollar start with American tourists, who travel abroad. When the US dollar rises in value against foreign currencies, Americans get more value for their money when in London, Paris or Japan.
The couple from Chicago may even feel that the inflation scare they faced at home isn’t so bad, after factoring in the exchange rate. As a result, they may buy themselves a new bag, belt or shoes. These purchases can increase the bottom line for sellers of these types of items. The stronger dollar could also help ease the pain at the pump, because crude oil is priced in dollars.
But with every winner there is also a loser. In the case of a strong dollar, countries that have a lot of dollar-denominated debt (which is much of the developing world, including large countries like Argentina and Turkey), the cost of servicing that debt increases as the value of the dollar increases. And since oil is a global commodity, the price of a liter of gas in Berlin, Brittany or Barcelona only became even more expensive with the rising dollar.
Finally, there is the problem of the American company doing a lot of business overseas. A strong dollar makes everything from an iPhone to a Microsoft software package to Costco store products less compelling compared to a local brand that is now cheaper because of the exchange rate. US multinationals could see margins squeezed, which could eat into profits and send share prices tumbling.
Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected]. Check out her website at www.jillonmoney.com.
