Not literally, but its value has reached its highest point

since the early 2000s.

The increase fits into a theory known as the dollar smile.

It says the dollar typically gets stronger

when the U.S. economy is healthy.

Like when it saw a period of economic growth in 2014

or when the global economy faces unexpected shocks,

like we're seeing in 2022.

But it loses value when the U.S. economy

is on a downward trend compared to the rest of the world.

Like in 2008 during the Great Recession.

That's how the dollar smiles.

- So the dollar reaching multidecade highs.

And that's because we have the Fed

that's in the middle of hiking rates.

We also have people that are very worried

about the state of economy.

I mean, normally this kind of increase comes like over time,

over two, three years.

So this is an unexpected surge hire.

- [Narrator] While a strong dollar might seem

like something to be happy about,

it's impact across the world can be more complicated.

Here's how the dollar starts to smile

and the unexpected consequences it can have

for the global economy.

Let's look back at that smile.

One of the main reasons the dollar remains attractive

to investors at both ends of the economic spectrum

is because it is a dominant global reserve currency,

which means every country keeps a certain amount

of U.S. dollars in their central banks.

- For foreign economies, the wide use of the dollar

allows borrowers to have access to a broad pool

of lenders and investors.

- [Narrator] According to the international monetary fund,

nearly 7 trillion U.S. dollars are held by 149 countries.

- Investors like the dollar because it's stable.

They know that you have a country

where there's a central bank that is stepped in

to shore up markets and intervenes in the economy

at whatever cost to make sure it doesn't crash.

- [Narrator] Because so many countries rely on the dollar

for trade and various transactions,

that means there's always demand for it,

which makes it more valuable.

But that demand fluctuates and depends largely

on the state of the U.S. economy.

When the economy is healthy,

investors bet on economic growth that will lead

to eventual interest rate increases.

The theory dubs this end greed mode.

- If you're buying currencies, you wanna hold the one

that's gonna give you a higher rate of return

that's linked to your central bank's rate.

- [Narrator] On the other end of the smile,

when the economy is struggling,

investors can flee to the dollar as a more secure asset.

That's fear mode, the end we're at now.

- So the dollar's benefited from basically

a confluence of events, volatile financial markets,

fears around growth in the global economy,

supply chain issues stemming from the fact

that China is still dealing with COVID,

and we have a war in Europe

that's spreading an energy crisis there,

and we have global inflation.

So all of that combined has people basically jumping

into the U.S. dollar as a haven.

- [Narrator] A haven is an asset that can retain

or even increase its value during an economic downturn.

The dollar's strength is determined by measuring it

against other global currencies.

When it gets stronger, other currencies grow weaker

by comparison.

In July, the dollar and Euro reached parity

for the first time in 20 years.

And as the value of other currencies fall,

the impact of the strong dollar ripples

through the global economy.

The dollar is the main currency used in global trade.

That means that things like food and energy

are usually priced in dollars when they're bought

and sold among certain countries,

even if they aren't buying from the U.S.

- So basically their currency's weakened,

which makes everything more expensive for them,

which means price increases, which is inflation.

So you're basically, there's this concept

that a stronger dollar exports inflation

to emerging market countries.

- [Narrator] But a strong dollar can actually have

the opposite effect for Americans

by helping bring prices down.

- Strong dollar benefits you

because it makes importing goods and services cheaper.

People like that.

It makes traveling abroad for Americans cheaper.

That's also a good thing.

- [Narrator] But as imports get cheaper for the U.S.,

exports get more expensive for other countries.

U.S. products become less affordable

and therefore less attractive to consumers

and businesses abroad.

That means that U.S. companies

that make a significant portion of their profits overseas

can see a decline in sales.

Companies have already taken a hit this year.

Microsoft, Salesforce and Coca-Cola are just a few

that have pointed out the negative impact

of the strong dollar on their financial results.

Here's Microsoft's chief marketing officer,

after the company filed an 8-K,

which is a form that reports unexpected changes

to shareholders.

- Say, you know, if you saw the 8-K today it was purely,

it was purely currency.

Continued strength of the dollar,

essentially is what we talked about in that filing.

- [Narrator] About 40% of S&P 500 companies' revenue

comes from outside the U.S.

And a decline in sales and future earnings

tends to make stocks fall.

But these lower earnings and reduced import costs

can also help curve inflation by bringing prices down

and forcing companies to slow spending.

- You're cooling things down when you have

a stronger currency, very indirectly.

So some analysts will say, it's almost the equivalent

of a rate hike.

So it's kind of tricky.

It's good, but when it gets too strong,

it can start being damaging.

- [Narrator] Experts expect the dollar to stabilize

later this year, but it's unclear when that might be.

- What you would need for the dollar to stabilize

is inflation data to cool.

You would need geopolitical uncertainty to fade,

and you'd need a greater belief that the global economy

is back on track, and that growth is going to return,

and that financial markets are going to calm down.

- [Narrator] When the global economy starts to settle

the dollar will likely stop smiling.

(pleasant music)