The Strong Dollar Is About to Pay Some Dividends

In times like these, I’m reminded of Robert Rubin. The former US Treasury Secretary in the Clinton administration was unequivocal that a strong dollar was in the country’s best interests, and the government should be careful not to undermine trust in the currency. The UK’s plan to ignite growth with tax cuts and borrowings has knocked down the pound and sparked fears of capital flight.

With a federal budget deficit of more than 3% of gross domestic product, no one would call the US fiscally conservative. But it increasingly looks like the cleanest of the dirty shirts among major economies. That’s reflected in the greenback. The Bloomberg Dollar Index that measures the currency against its major peers rose by the most since March 2020 at one point on Friday, extending its gain since the middle of last year to more than 17%. Other measures put the dollar at its strongest in two decades.

The knee-jerk reaction would be that the currency’s appreciation is hurting exports by making American goods more expensive on the world stage. The Trump administration at times suggested that the dollar was too strong, and a weaker currency would benefit the US by boosting exports and cutting the trade deficit.

Such notions lose sight of the true benefits of the dollar being a dependable store of value. The assurance attracts foreign capital, which services America’s budget and trade deficits while keeping a relative lid on borrowing costs. Just last week, the Treasury Department said foreign holdings of US Treasuries and related securities rose by $70.4 billion in July to $7.50 trillion. The amount foreigners own has climbed 50% over the last decade, despite increased borrowing and bigger deficits.