Why the Strong U.S. Dollar Scares Investors

Up 24% against major currencies since May 2014, the greenback is putting pressure on earnings of U.S. exporters and multinationals.

Why has the dollar been so strong? A number of reasons. Our economy has been strengthening, especially relative to the economies of Europe and Japan—and even compared with the economy of China, where the rate of growth outpaces ours but is slowing. Our trade balance has improved, thanks to a boom in energy production, which has drastically cut oil imports. At the same time, the U.S. budget deficit is shrinking. That all helps to attract investment in the U.S. But a huge impetus for the surging dollar is the gap between interest rates here and abroad. The 1.9% yield on the 10-year Treasury bond may seem paltry, but it beats 0.2% on Germany’s 10-year note and 0.4% on Japan’s. That situation is unlikely to change soon. The Federal Reserve is the only major central bank expected to raise rates this year; many others have cut rates or are providing monetary stimulus in other ways.

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Anne Kates Smith
Executive Editor, Kiplinger's Personal Finance

Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage,  authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.