NerdWallet's Smart Money Podcast - Leveraging the Strong US Dollar: Insights for Travelers and Investors

Episode Date: May 15, 2024

Learn how the strength of the US dollar impacts your finances, as well as its ramifications on the US and global economies. What does it mean to have a strong dollar? Who benefits the most from a strong US dollar? Hosts Sean Pyles and Anna Helhoski delve into the implications of a strong dollar on both domestic and global economies. They interview Cris deRitis, deputy chief economist at Moody’s Analytics, to demystify what a strong dollar means beyond its impact on travelers, along with what will happen if the dollar continues to become stronger. Then, Sean and Anna explore recent headlines, including major airlines’ resistance to transparent fee disclosures and record-breaking travel projections for Memorial Day weekend. They also discuss consumer discontent with credit card rewards programs, shedding light on hidden fees and devalued rewards. In their conversation, the Nerds discuss: strong dollar, airline fees, credit card rewards, money news, global economy, domestic economy, travel impact, economic insights, airline transparency, travel fees, currency strength, dollar value, monetary policy, Federal Reserve, travel tips, consumer finance, economy analysis, finance trends, airline industry, vacation planning, personal finance, currency valuation, money management, economic stability, international travel, financial headlines, economic updates, financial education, and economic trends. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhosky. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic and then leave you with the latest money headlines. Today, we're talking about greenbacks. Bucks. Clams. Smackers.

Dead presidents. Legal tender. That too. The almighty dollar is pretty almighty these days. If you've gone abroad, you know this is a good time to travel because you get a lot for that dollar in foreign currencies. So that's awesome, right? Well, yes, for traveling. But a strong dollar has all kinds of other ramifications for the U.S. and global economies and your personal economy. So today we're going to hear about and global economies and your personal economy. So today we're going to hear about that strong dollar and what it means.

I talked earlier with Chris Dorites. He's the Deputy Chief Economist at Moody's Analytics. Chris, welcome to the show. Thanks, Anna. So let's start by explaining the basics of a strong dollar. We mentioned earlier in the show that the way a lot of people experience a strong dollar is when they travel. But what else does it mean to have a strong dollar? Yeah, so basically a strong dollar means that your dollar can buy more of other currencies. And then by extension, you can buy more goods and services that are denominated in those other currencies. So you're right, the strength of the dollar is most obvious when we travel and we experience prices that are cheaper than what we might see at home. So we buy a sandwich for $2 versus an experience of buying that same sandwich for $10 back home.

So we feel wealthier. But a strong dollar can also lower the price of imported goods and any goods that are traded in dollars like oil as well. So when we talk about a strong dollar, what's the scale of that? If the dollar is strong, how many other currencies are weaker? I don't think we need a number, but if you have an estimate for scale. Yeah. So typically when we're thinking about a strong dollar, we're comparing the dollar to a basket of other currencies that are based on trade volume. So countries that the US trades a lot with like Mexico, China, or Canada

get a large weight in that measure. And other countries like Colombia might receive a very small weight. So the dollar is relatively strong today to that basket of currencies, but as you kind of allude to, there's a lot of variation in that. So the dollar is a bit stronger than say the Euro or the British pound today relative to 2019, but not dramatically. And no one traveling to Europe this summer is going to say, wow, everything's on sale, right? It's a bit stronger, but not dramatically stronger. And then on the other hand, there are some cases where that's not the case, right? So the Japanese yen, for example, right now has fallen a lot this year. So the dollar has really appreciated significantly against the yen. And other currencies like, of course, the Argentine peso are under enormous

pressure. So there the dollar has appreciated a lot. Someone traveling to Argentina can get a lot of pesos for a dollar. They probably want to spend them pretty quickly because inflation is so high there. So there's just a lot of variation. For the most part, the dollar has appreciated across that basket of currencies, but there are some other examples where that's not the case. Like the yen, the Mexican peso has actually appreciated against the dollar, right? So there are some other examples there as well. Now, the US dollar, has this been a gradual development in strength or was there something in recent weeks or months that caused it? So again, I'd say it probably depends a bit on the specific currency that we're talking about. But for the most part, it's been something that has occurred over time. The dollar has been

gradually increasing in value. There was the event in 2022, of course, with Russia's invasion of Ukraine that sent the dollar skyward. You had a lot of foreign investors worried about geopolitics and price of oil, and so they piled into the dollar, and then that sent its value upward. But that's had since resolved itself, and now it's more of a gradual increase in the value of the dollar over time, really due to the Fed's monetary policy and the fact that US treasuries just can offer a better interest rate relative to some other currencies. And that was really my next question. So much in the U.S. economy hangs on the Fed's every word and action. Does the dollar strength as well? Absolutely. So the Fed has both

direct and indirect impacts on the economy. Certainly the dollar strength is a result of the Fed's monetary policy. There are some other considerations like the inflation rate in the US or, again, the relative safety of the US dollar compared to other currencies around the globe. But much of the dollar strength today does depend on that relative interest rate that the Fed does control. So as long as interest rates in the US remain relatively high, you're going to see more foreign investors attracted to that higher return. So let's talk about the effects of a strong dollar first in the US and then abroad. So first off, what does it do to the US economy? Yeah. So a strong dollar makes foreign goods and

services cheaper for US consumers and businesses, and it makes US goods and services more expensive for foreigners, right? That's the gist of it. In general, I'd say that it's a bit of a wash. Unless we're talking about extreme movements in the value of the dollar relative to some specific currency, typically what you'll have is households and businesses perhaps benefiting from some cheaper goods that they import, but then exporters suffering because the demand for their goods and services falls. So I guess more or less a wash, but it can certainly vary from industry to industry. And are there any kind of other global repercussions? Well, here too, it kind of really depends. You have other countries that might benefit

by exporting more into the United States, right? So the dollar's stronger, they can ship their goods and services over, there's going to be more demand, so that's a benefit. But then on the other hand, if those other countries are purchasing anything that is denominated in dollars, like US goods or services or the price of oil, that's going to hurt them. Again, it depends a bit on what that other economy structure looks like. You also have some countries out there that do borrow in US dollars in order to get a lower interest rate. Households, businesses, or even governments will borrow in US dollars.

And if the dollar strengthens, that, of course, makes it a lot harder for them to pay back. And that can certainly harm those economies. So other than American tourists, who's going to benefit the most from a strong dollar? So I'd say it's American households and businesses that buy any imported goods, right? Ultimately, the stronger dollar should result in some cheaper prices. Retailers who buy imports to sell in their stores certainly may be able to see an improved profit margin. US manufacturers who may import certain goods that go into their production could see a benefit on that end. But then, of course, if they're also exporting, then they may be harmed.

So as usual, it kind of depends on specifically who we're talking about. And so other than U.S. manufacturers that are going to export, who else gets the short end of the stick from a strong dollar? Well, it would be foreign tourists to the United States. So we talked about the benefits of U.S. tourists going abroad. But of course, anyone coming to the United States is going to face some higher prices if they're facing a stronger dollar. And then again, in general, any foreigner who's buying dollar-denominated goods or services or assets is going to face higher prices. So we touched on this a little bit already, but would you say that at least for the average US citizen, the biggest effect is on travel? Is the message go abroad while you can get more for your money? Travel is definitely where US citizens are going to see the effects most directly. But those imported goods I mentioned, they should show up as cheaper prices over time, although it typically takes more of a lag for those prices to show up. And you have more

distributors and other retailers who may eat into some of that dollar strength that might go to their margins versus being passed on all the way to consumers. But eventually, consumers should see some benefit in terms of lower price. And what happens if the dollar keeps strengthening? So is it possible for it to get so strong that it becomes a really bad thing? Yeah, this is a great question. I think over the last few decades, we've been kind of taught that a strong dollar is a good thing. We even call it a strong dollar, right? So who wouldn't want something that's strong? And for the most part, I think that's true. There are a lot of benefits we talked about. But I mentioned that exporters do get hurt. And if the dollar is too strong, those exporters or multinational companies, they're going to feel more and more of the pain.

And they may cut back certainly on their production and employment. So it can hurt the broader economy. If you really go really too far, you can think about deflation. So if the prices of foreign goods keeps falling, you could see outright deflation. Now, where we're at today with still high inflation, you might think that that's a good thing. But if you go too far, you could end up in that deflationary spiral where prices keep falling, households kind of sit on the sidelines waiting for prices to fall further, and that causes businesses to pull back. So there's certainly a more negative consequence here. So I really don't like the term strong dollar, to be honest. I think what we want is more of a balanced dollar, right? We want a dollar that kind of helps households in

terms of the imports a bit, doesn't harm the exporters too much, right? So you're kind of looking for that balance. And more than anything, you're probably looking for stability, right? If it's predictable what the dollar's value is, people can plan around that. Krista Ritus, Deputy Chief Economist at Mooney's Analytics, thank you so much for helping us out today. Oh, thank you. Up next, a few money headlines in the last few days. Sean, as many folks might be aware, the Biden administration has been on a mission to clamp down on all the junk fees that we find ourselves paying for, well, everything.

Ticket fees for concerts, resort fees at plain old hotels, student loan fees, and not least, airline fees. Well, the airlines are now pushing back. Yeah. Reuters reports that just in time for the summer travel season, six major airlines and the group that represents them are suing the transportation department in federal court. That's right. Last month, the DOT announced that airlines have to show any fees right alongside the airfare, including fees to check bags or change your flight. Right now, you'll often find a link to those fees, but they're not displayed by the price of the ticket. The airlines that sued are Alaska, Hawaiian, Delta, American, United, and JetBlue. The suit says the new rules are capricious and

arbitrary. It also says the transparency requirement could, quote, complicate the buying process. Speaking of summer travel, Anna, are you going anywhere fun for the Memorial Day weekend? My only plans are to avoid traffic by staying put and enjoying a half-empty city. How about you, Sean? I'll be staying local and cat-sitting for a friend who is traveling. But those who are leaving town will be in good company, the company of 44 million other travelers, according to AAA's annual Memorial Day weekend travel survey. Whoa, 44 million? Yup, an increase of 4% from last year and close to the record set in 2005. But not all of those people will be on the road.

38.4 million will be on car trips, AAA says that's a record, 3.5 million in planes, where they'll be paying all those fees, and 1.9 million in other, which I guess means trains, boats, and maybe scooters? And finally, Sean, a report from the Consumer Financial Protection Bureau that shows a whole lot of people are not happy with their credit card rewards programs. Are we back on the fee beat here? Well, that's one problem, but fine print is another. Consumers tell the CFPB that they are really fed up with finding out

that those rewards are devalued or even denied, even after they've met all the supposed requirements. Yeah, so those terms and conditions in six-point font can hide all kinds of exceptions and what the CFPB calls bait-and-switch tactics. The report also found that consumers are unhappy that interest rates and fees can basically cancel out the value of any rewards they might get, to which we here at NerdWallet say, please try to not carry a balance so you can hopefully avoid interest entirely. Another problem, and we hear about this one a lot, is that you'll amass all these reward points at airlines or hotels or the like, and suddenly the program changes and those points are worth a lot less. That's because you have to use more of them to get a reward. It's a game and not many people want to play. So I'll remind listeners that a great way to find out if a reward program is on the up and up and worth your spending money is through NerdWallet. This is one of our big

specialties. So head on over to our website before you get excited about any credit card signup bonuses, and we'll tell you what's what. Then go right to the CFPB. And that's what we saw and heard over the past week in Money News. Let us know what we missed and send us the headlines you've seen and want to hear more about. That's it for this week's Money News. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. Or send us a voice memo at podcast at nerdwallet.com. And remember to follow, rate, and review us wherever you're getting this podcast. Today's episode was produced by Tess Vigeland and edited by Rick Van Rickenife. Sarah Brink mixed our audio. Here's our brief

disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.