The Dollar Is Strong. What Could Go Wrong?

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What's Happening Today

Have you looked at the markets, your bank account, or your retirement fund today? They're likely not looking too pretty. And while I don't want to cause anyone to panic, things aren't looking up … at least not yet.

Checking in on the markets today, stocks are mixed as markets remain volatile in the wake of the Fed's latest inflation-fighting moves and a "currency crisis." We went into the weekend with stocks in sell-off mode as the Dow sank roughly 500 points in the course of the trading day Friday and just narrowly avoided ending in a bear market.

With the Federal Reserve committed to raising interest rates in its fight against inflation, the likelihood of a recession (and the fears of one) have only gone up, and investors have a lot to worry about. This week, we'll be hearing from presidents of regional Federal Reserve banks—as well as Fed Chair Jerome Powell himself—which could give us more clues about what we can expect from the central bank going forward. Friday, we'll get more insight on inflation when the Personal Consumption Expenditures (PCE) Price Index is released.

Strong Dollar Is Adding to Fears

Investors are also concerned about the falling strength of foreign currencies against the U.S. dollar. This might sound strange—a strong dollar is a good thing, right? If you're going on a trip soon, then yes. Not only will the cost of hotels and dining out be cheaper for you, but so will higher priced luxury items like handbags and shoes. In fact, if you are heading overseas soon, this would be the time to snag some high-priced goods for much less than you would spend here in the U.S.

But a strong dollar isn't always great for global trade or markets, and here's why: Many financial transactions are done in dollars and with so many foreign currencies getting weaker each day, it's getting more difficult for other countries and companies to keep up. The result? Turbulence that you're probably witnessing in your retirement and investment accounts, and the markets at large.

So what can you expect this week and next, and beyond? Chances are, we'll be in for a bumpy ride, so I would recommend everyone buckle up and get ready. We'll get through it, but we might be a little bruised when it's all over.

- Kristin

Editors' Picks

British Pound Hits Record Low Against Dollar, Bonds Roiled as Tax-Cut Plans Spook Investors (The Wall Street Journal)

Don't Look for a Stock Market Bottom Until a Soaring Dollar Cools Down. Here's Why. (MarketWatch)

Everything to Know About Currency Risk In International Business (The Balance)

Factory Jobs Are Booming Like It's the 1970s (The New York Times)

Can I Save More Money and Still Have Some Left To Spend? (The Balance)

Why Do Asset Prices Fall When Interest Rates Increase? (The Balance)

How To Find and Invest in Low-Volatility Stocks (The Balance)

Term of the Day

Currency Crisis

A currency crisis occurs when a currency experiences extreme volatility, causing a negative impact on a country's financial markets and economy.

A currency crisis can be caused by many factors. Sometimes, a crisis can occur when a currency suddenly experiences volatility that results in speculation in the foreign exchange (forex) market. Currency pegs to other currencies can break down, leading to a crisis.

A central bank's monetary policy decisions, such as rapidly hiking or lowering interest rates, can also impact capital flows into and out of a country, causing a currency exchange rate to fluctuate wildly and lead to a currency crisis.

Off the Charts

When interest rates rise, the prices of stocks, bonds, real estate, and other assets can decline below what they would normally be worth, as the "risk-free" rate becomes more attractive, and the cost of capital increases.