Whether you’re buying shares of companies based in the United States or beyond our borders, investment decisions are generally driven by the same fundamentals. Are earnings consistently rising? Is the balance sheet solid?

But international investing adds a layer of complexity: currency. The world’s dominant currency, the U.S dollar, currently hovers at its highest level in 20 years compared to other major currencies.

There are pros and cons to a strong dollar. In some ways, a super-strong greenback is a bad thing. I’ll get to that in a minute. First, let’s examine recent market action.

The major U.S. equity indices slumped Monday, extending the selloff that was triggered Friday by Federal Reserve Chair Jerome Powell’s hawkish speech. Powell threw cold water on the idea that the Fed might execute a dovish pivot next month.

These dovish hopes now seem deluded, in the wake of Powell’s stern warning that fighting inflation remains the Fed’s top priority. In pre-market futures trading Tuesday, U.S. stocks were bouncing back, as investors returned their focus to economic positives such as jobs growth.

Seesaw activity in equities is likely to continue for at least the rest of the year, as the changing picture for inflation and Fed policy preoccupies investors.

Watch This Video: Powell Reminds Wall Street: Don’t Fight The Fed!

Consumer Price Index (CPI) data for August, scheduled for release September 13, will play a huge role in determining whether the Fed raises rates by 50, 75 or even 100 basis points at its next policy meeting September 20-21. In the meantime, U.S. Treasury yields have been rising and as of this writing, they’ve nearly reached 3.1%.

In bad news on the inflation front (but in further good news for energy investors), crude oil has resumed its climb after OPEC+ announced potential supply cuts.

President Biden has been jawboning the cartel’s de facto leader Saudi Arabia to throw open the spigots, but the House of Saud has been resistant because of the White House’s inconvenient (albeit inconsistent) emphasis on human rights.

The greenback flexes its muscle…

The value of the U.S. dollar has been on a tear over the past year. That’s positive for American consumers, because it makes imported goods and services cheaper.

But the strengthening dollar is a headwind for American investors who own shares of foreign companies, because earnings in yen, euros and other currencies become less valuable in dollar terms. That, in turn, drags down share prices.

The dollar’s rise is propelled by recession and geopolitical fears that are prompting investors to flock to safe havens (see chart).

The DXY (known colloquially as “the Dixie”) trades in the futures market on the Intercontinental Exchange (ICE) and the over-the-counter market among foreign exchange dealers. The DXY reflects dollar strength or weakness and is a pricing yardstick for many commodities. The DXY is a measure of the dollar against a basket of six major rival currencies.

The dollar’s strength is great news for my wife Carole, who has been hankering for a late summer sojourn in Europe. But it’s a problem for countries with dollar-denominated debt and for U.S.-based exporters.

A stronger dollar makes U.S. exports more expensive to foreign customers, and that could cut into the profits of many U.S. companies, which could harm or stop the recovery. By the same token, this dynamic can help curb inflation, by lowering the cost of imported goods.

The dollar’s strength also brings more investment to these shores. When the Fed hikes rates, Treasury yields also tend to rise. This entices more money into the U.S. from international investors, who in turn buy dollar-denominated bonds to get higher yields than they can get in their own countries.

But a stronger dollar has made oil and gas products more expensive worldwide, because most of these energy contracts are priced in dollars, The higher dollar threatens the global economy, because it adds pricing pressures on international economies.

A strong dollar also bodes poorly for emerging markets that are dependent on dollar-denominated debt, because it becomes harder for these regions to service their debt.

The euro, which typically has been a relatively strong currency against the U.S. dollar, has actually fallen below parity and is now weaker than the greenback.

The dollar’s strength should continue into 2023, as interest rates rise. So keep an eye on the dollar. When the dollar is described as “strong,” that strength is both a blessing and a curse.

PS: There’s more to currency than conventional national fiat currencies. Think…cryptocurrency. Crypto has experienced its share of ups and downs lately, but we could be on the cusp of witnessing the biggest change in financial history, when crypto finally goes mainstream. That’s the view of my colleague, Jimmy Butts.

Jimmy Butts is chief investment strategist of the Capital Wealth Letter, one of America’s most trusted financial research advisories. Jimmy has pinpointed what he considers to be the three best ways for investors to cash in on crypto. Click here to learn more.

John Persinos is the editorial director of Investing Daily.

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