MONEY Currency

Why You Might Not Want to Cheer for a Strong Dollar

Chris Pine in JACK RYAN: SHADOW RECRUIT, 2013
Anatoliy Vorobev—©Paramount/Courtesy Everett Col Don't tell Jack Ryan, but a strong buck is a mixed blessing.

It makes foreign vacations cheaper, but selling things to foreigners harder

The U.S. dollar has strengthened against pretty much every major currency over the past year. That feels like good news—and in some ways it is. It means that investors worldwide are betting that the U.S. economy is strong; it’s also nice if you’ve been planning a get-away to the French countryside.

And intuitively it just feels like a strong U.S. currency is a good thing, and a weak one is bad. Last year, the plot of the action flick Jack Ryan: Shadow Recruit turned on a (mild spoiler alert) Dr. Evil-like plot to tank the greenback’s value.

But at this moment a too-strong dollar may be the bigger worry.

That is the context behind all the headlines you may be seeing these days about so-called “currency wars.” In a currency war, countries don’t try to take down other nations’ currencies. Instead, they cut the value of their own currencies, in order to make their products cheaper and stoke demand. When one currency falls, that means somebody else’s currency has to go up. Lately, the U.S. has been that somebody else.

Currency

 

Why is the dollar going up? Central banks around the world, from Europe to Japan to Mexico, have been doing what our own Federal Reserve did following the financial crisis, buying up bonds and aggressively seeking to hold down their interest rates. They’re not only doing this to lower the relative value of their currencies—nobody has actually declared a currency war—but it has had that side effect. With yields on 10-year German bonds at just 0.3%, U.S. Treasuries that are paying almost 2% look like a better deal.

When investors seek to hold U.S. assets, that pushes up the buck too.

And there’s reason to think the dollar will keep getting stronger for a while, says Wells Fargo Securities senior economist Sam Bullard. The U.S. economy looks pretty good right now compared with the rest of the world. The American gross domestic product, for instance, grew by 4.6%, 5%, and 2.6% over the past three quarters, while the eurozone muddled through with growth rates at 0.3% or lower. Our unemployment rate is down to 5.7%, while in the eurozone it is stubbornly stuck over 11%.

As a result, the Federal Reserve has begun to put out hints that it will raise short-term interest rates sometime in 2015, the first increase since the Great Recession. Again, that should make dollar-denominated assets relatively more attractive. And a strong dollar trend could feed on itself—the more stable the dollar looks, the more people will want to to invest in the U.S. “Investing over here if you’re foreign company committing capital is more attractive since returns will get translated into your home currency at a more favorable rate,” says Bob Landry, a portfolio manager at USAA Investments.

Still, whenever there are winners, there are also losers.

Who’s losing out? For a start, multinational corporations with significant businesses overseas. Procter & Gamble and its shareholders, for instance, endured disappointing earnings last year and announced that the consumer goods behemoth doesn’t expect to enjoy sales growth this year due to the dollar’s strength.

A strong dollar generally makes U.S. exports less attractive—consumers with euros and yen are finding our products more expensive. The ISM manufacturing new export orders index fell in January to its lowest level since the fall of 2012. That’s bad news for anyone who works in manufacturing, or any other business that hopes to sell to global markets.

Overall, Bullard says, a strong dollar should be “a net drag on overall GDP in 2015.” Perhaps Jack Ryan could have saved himself the trouble.

MONEY europe

Europe’s Version of the Fed Announces a Big New Stimulus Plan

The symbol of the Euro, the currency of the Eurozone, stands illuminated on January 21, 2015 in Frankfurt, Germany.
Hannelore Foerster—Getty Images The symbol of the euro, the currency of the eurozone, outside the European Central Bank in Frankfurt, Germany.

The European Central Bank just took on its own version of "quantitative easing." Get ready to feel the ripples.

On Thursday European Central Bank president Mario Draghi announced plans to implement a bond buying strategy known as quantitative easing. The ECB, which is the European equivalent of the U.S. Federal Reserve, is hoping to boost the struggling European economy. The Fed implemented a similar effort several years ago.

Under QE, the European bank will buy up tens of billions of euros worth of bonds each month. That should help keep interest rates low and help stave off a worrying trend of falling prices, or deflation.

With the U.S. economy finally humming along, you may be tempted to shrug off the news. But changes in interest rates and prices across the Atlantic quickly ripple across the globe. Here’s how the move could affect you.

It may hold down interest rates and bond yields.

Ever since the Fed cut key interest rates in the wake of the U.S. financial crisis, bond yields have been unusually low. Although many forecasters expect the Fed to begin raising rates in 2015, the ECB’s latest move could keep a lid on how far yields on Treasuries rise.

European bonds already yield considerably less than Treasuries—German government bonds maturing in 10 years pay 0.4%, compared to about 1.9% for Treasuries. If QE continues to depress European yields, more and more buyers are likely to seek out Treasuries, pushing Treasury prices upwards. Bond yields fall when prices rise.

Continued low rates would be good news for borrowers but a mixed bag for investors. Although bonds would lose value when rates begin to rise, many income oriented investors and saver have been frustrated by low payouts, forcing them to hunt for riskier alternatives.

It could further strengthen the dollar.

By buying up bonds, the ECB is essentially creating more euros. On Thursday, the value of the euro fell to $1.16, according to Blommberg. That’s its lowest level in more than a decade. In the long run that should help European companies by making it cheaper for U.S. consumers to buy their goods. But if you own foreign stocks, you’re likely to feel some pain, at least in the short run.

The European stocks you own are denominated in euros, but the value of your account is denominated in dollars. As the dollar rises, a European stock simply isn’t worth as many dollars as it was before, assuming its price in euros didn’t change. The good news is, you don’t need to worry unless you plan to sell right away. In the long run, such currency fluctuations should even out.

The U.S. stock market is happy—for now.

The Dow climbed about 117 points, or 0.7%, to 17,671 in morning trading. While it’s always tricky to interpret stock market ups and downs, it seems likely investors are applauding the ECB’s aggressive action to prevent a deep recession, just as they did over the past several years when the Federal Reserve made similar moves. With the U.S. economy finally humming, the Fed’s strategy seems to have worked. Ultimately the best thing for stock values is to get Europe, a major driver of global growth, back on the same path.

TIME Currency

Bitcoin Continues to Plummet

Newest Innovations In Consumer Technology On Display At 2015 International CES
Ethan Miller — Getty Images A general view of the Bitcoin booth at the 2015 International CES at the Las Vegas Convention Center on Jan. 8, 2015 in Las Vegas, Nevada.

The digital currency is getting off to a poor start in 2015 after a rough ride last year

The price of Bitcoin dropped again this week, sliding to its lowest level since early 2013, suggesting that confidence in the contentious cryptocurrency may be shrinking.

On Tuesday, the price of Bitcoin dropped from $267 to about $224, sinking below its April 2013 value, which was before its popularity skyrocketed, according to the New York Times.

In the past year, the digital currency has been hit with myriad setbacks including market woes, fresh regulations and stagnation of usage even as transactions have increased, which in part resulted in a more than 50% drop in the price of bitcoin.

[NYT]

TIME Currency

How I Laundered Bitcoins On the Streets of New York

bitcoin-surrounding-many-coins
Getty Images

There are over 1,600 Bitcoin sellers in New York alone and thousands more across the country

This story was originally published at the The Kernel, the Daily Dot’s Sunday magazine.

As I stood on a Brooklyn street corner late at night with one hand gripping a wad of cash in my jacket and the other clutching the smartphone in my pocket, an old memory hit me. The place looked exactly like a street corner where I bought weed once (or maybe twice) in high school.

This time I was making another transaction, one that could also confuse bystanders and get a second look from local police. I was getting ready to buy bitcoins.

There are plenty of other ways to acquire the virtual currency. There are even Bitcoin ATMs in several cities in North America. But sites like LocalBitcoins.com—a Craigslist-inspired directory that brokers real-life transactions for a modest fee—serve a very specific type of clientele, those trying to cash-out their bitcoins or acquire them without tying the transaction to their actual identity, often with the intention of staying on the blindside of the law.

I remember feeling vulnerable back in high school, worrying about being robbed or arrested. A similar weight started to settle in as I waited for the stranger I found online. I knew nothing about him, not even his name or what to look for. He just instructed me to come to this intersection with my smartphone, ready to complete the transaction.

The $160 that I carried wouldn’t even buy me a single Bitcoin, but it’s always best to test the waters with small stakes. The dealer was willing to exchange as much as $5,000 per transaction, and others offer services that double that.

I leaned into a shadow on the gate of a shuttered bodega and checked the time. My seller was late.

Read the rest of the story at The Kernel.

TIME Currency

Hackers Steal $5 Million From Bitcoin Exchange

Breach follows massive hack of Mt. Gox in 2014

A European Bitcoin exchange had about $5 million worth of the cryptocurrency stolen by hackers over the weekend.

The Slovenia-based Bitstamp announced the breach on its website Monday and shut down services temporarily Tuesday in order to investigate the hack. The theft totaled about 19,000 Bitcoin, but hackers were only able to access a small portion of the exchange’s total assets. While some Bitcoins are stored online, many more are kept on local hard drives in what Bitcoin users call “cold storage.”

Bitstamp wrote on its website that it would ensure users’ account balances were “honored in full” despite the breach.

The hack comes less than a year after the collapse of Mt. Gox, the once-massive Bitcoin exchange that lost more than $450 million worth of Bitcoin and then filed for bankruptcy. Bitcoin lost half of its value after Mt. Gox imploded. So far, though, the Bitstamp breach doesn’t seem to have negatively influenced the price of the currency.

MONEY Tech

NYC May Soon Accept Bitcoin And Apple Pay For Parking Tickets

New York City is considering accepting alternative payment methods like Bitcoin and Apple Pay for parking tickets.

MONEY Markets

Why Russia Is Destroying Its Own Economy

A woman walks past a board listing foreign currency rates against the Russian ruble outside an exchange office in central Moscow on December 16, 2014. The Russian ruble set a new all-time record low on Tuesday after bouncing back briefly despite an emergency move by Russia's central bank to raise interest rates to 17 percent.
Kirill Kudryavtsev—AFP/Getty Images

In short, because Russia has a problem more urgent than its declining GDP.

Things aren’t exactly going well in Vladimir Putin’s Russia. Oil prices have fallen to $59 a barrel and the nation’s economy is on pace to contract between 4.5% and 4.7%—more than twice the contraction caused by our own Great Recession—if that price remains at $60 or below. Meanwhile, Russia is straining against American and European sanctions that are putting even more pressure on the country’s finances.

When the United States was facing recession, our Federal Reserve lowered interest rates to near-zero levels—and has kept them there. That stimulated the economy by making spending and investing more attractive (credit was cheap) and turning saving into a losing proposition (on top of low interest payments, money in the bank could potentially be eaten away by inflation).

But Russia has apparently adopted the opposite strategy. Instead of lowering rates to spur investment, the nation’s central bank has raised its key rate to a whopping 17%. That means simply leaving rubles in the bank will lead to extraordinarily high risk-free returns. Unless businesses can find an investment opportunity that will make them even higher returns, a very tall order, there’s no point in withdrawing any money. Why spend on a new store or factory when you’ll make more just letting your cash sit in a vault?

Read more Gorbachev Blames the U.S. for Provoking a ‘New Cold War’

It’s very likely, in other words, that Russia’s higher interest rates will slow its already slowing economy. Rosnef, a state-owned oil company, has already accused the central bank of “pushing Russia towards recession.”

But if that’s true, then why is Russia pursuing such a policy? The reason is that Russia has an arguably even more urgent problem than its slowing economy. Russia’s currency, the ruble, has been in free-fall as oil prices have dropped, and is now down 47% against the dollar since the beginning of the year. This is a big problem for Russian companies that need to pay their debt in dollars, and whose rubles are now worth nothing on international markets. Worse, Western economic sanctions have prevented businesses from accessing reserves of foreign currencies overseas. Without drastic action, Russia could find its economy permanently crippled by an all-but-worthless currency.

Since people selling their rubles for dollars is what’s pushing the currency down, the central bank has raised interest rates to make holding on to rubles more attractive. That’s meant to keep the currency’s value up, even at the expense of short-term economic growth.

The plan doesn’t appear to be working, however. Even after a massive jump in interest rates, the ruble has continued to crater. Economists are now suggesting Russia may be forced to impose capital controls—policies that would make trading rubles for dollars more difficult or expensive, or require exporters to convert dollars to rubles—to prevent a further sell-off.

Ultimately, anything short of an increase in oil prices is unlikely to do much good. Oil and gas revenues make up roughly half of Russia’s budget, and without that money, the country is in for rough times. “The central bank was too late with its move,” one expert told Bloomberg. “Without oil and the economy stabilizing, the ruble won’t rise.”

Read next: What Russia’s Ruble Collapse Means for the World

TIME Innovation

Five Best Ideas of the Day: December 16

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

1. Micropayments and digital currencies will ignite an explosion of disruptive innovation.

By Walter Isaacson in LinkedIn

2. Latin America is taking the lead with progressive food policies — and putting public health above the interests of the food industry.

By Andy Bellatti in Civil Eats

3. To preserve biodiversity and lift up communities facing hunger in sub-Saharan Africa, indigenous plants might provide a solution.

By Amy Maxmen in Newsweek

4. Teacher preparation programs seek change with a pinpoint innovation approach. It’s time for a broad scale transformation of teaching.

By Kaylan Connally in EdCentral

5. Making clean plastics from biofuel waste could free up valuable farmland for food crops.

By Matt Safford in Smithsonian

The Aspen Institute is an educational and policy studies organization based in Washington, D.C.

TIME Ideas hosts the world's leading voices, providing commentary and expertise on the most compelling events in news, society, and culture. We welcome outside contributions. To submit a piece, email ideas@time.com.

TIME Terrorism

ISIS Is Minting Its Own Money

A member loyal to the ISIL waves an ISIL flag in Raqqa
Reuters A fighter from the Islamic State in Iraq and Greater Syria (ISIS) waves a flag in Raqqa, Syria on June 29, 2014.

It will be circulated in areas of Syria and Iraq

The militant group Islamic State of Iraq and Greater Syria (ISIS) said Thursday that it plans to introduce its own currency in the areas under its control because it wishes to “emancipate itself from the satanic global economic system.”

ISIS said it will be minting new gold, silver and copper coins as part of a new currency called Dinar, according to a message translated by SITE Intelligence Group, an organization that monitors terrorist activity.

MORE: ISIS leader’s new orders: ‘Erupt volcanoes of jihad”

It is not yet clear how ISIS will produce the currency, which will be “based on the inherent value of the metals,” but the group says its “Treasury Department” will organize minting and circulation.

ISIS did not say when the currency would be launched or specify in which areas it would begin circulating the currency.

MORE: How to financially starve ISIS

TIME Economy

The Strength of the U.S. Dollar Reflects Global Economic Reality

A man stands next to a money changer in Colombo
Dinuka Liyanawatte—Reuters A man stands next to a money changer in Colombo, Sri Lanka, on Feb. 29, 2012

All hail the almighty greenback!

Ever since the Wall Street financial crisis of 2008, predictions of the dollar’s demise have come fast and furious. As the U.S. economy sank into recession, so too did confidence that the greenback could maintain its long-held position as the world’s No.1 currency. In Beijing, Moscow and elsewhere, policymakers railed against the dollar-dominated global financial system as detrimental to world economic stability and vowed to find a replacement. Central bankers in the emerging world complained that the primacy of the dollar allowed American economic policy to send shock waves through the global economy that roil their own markets and currencies.

But here we are, six years after the crisis, and the dollar is showing just how resilient it actually is. The dollar index, which measures the greenback’s value vs. a basket of other currencies, has reached a four-year high. Those policymakers who bitterly criticize the dollar show little actual interest in dumping it. The amount of U.S. Treasury securities held by China stands at a whopping $1.27 trillion.

The newfound strength of the dollar makes perfect sense. Sure, the world economic landscape is changing, with new rising powers like China and India, whose currencies may one day rival the U.S. dollar. But the buoyancy of the greenback is a reflection of today’s reality: the U.S. is the lone, significant bright spot among the world’s major economies. GDP in the third quarter grew an annualized 3.5% — far higher than other industrialized economies. That’s why the Federal Reserve has wrapped up its long-running and highly unorthodox economic-stimulus program known as quantitative easing, or QE, which, by spilling a torrent of dollars into global financial markets, was one factor behind the currency’s weakness in recent years.

Meanwhile, most of America’s key trading partners are heading in the opposite direction. The European Central Bank (ECB) is widely expected to start its own QE program to try to combat potential deflation and jolt sagging growth in the euro zone. That’s why the euro’s value against the dollar has been sinking to levels last seen two years ago. If the ECB does act, downward pressure on Europe’s common currency will likely intensify.

Meanwhile, in Japan, the central bank on Oct. 31 surprised markets by greatly broadening its own monetary-expansion program in an attempt to rescue Prime Minister Shinzo Abe’s stumbling initiatives to revive the long-slumbering Japanese economy, nicknamed Abenomics. The yen tumbled to a seven-year low against the dollar as a result. Research firm Capital Economics predicts that the Bank of Japan’s (BOJ) action will help push the Japanese currency all the way down to 120 yen to the dollar by the end of 2015, from about 112 today.

The dollar has been gaining against some emerging-market currencies as well. Faced with slowing growth and the strain of economic sanctions, Russia’s ruble has been hitting repeated all-time lows against the dollar. Not even an interest-rate hike by Russia’s central bank on Friday has been able to stem the slide. On top of that, though that pressure has eased, the currencies of India, Indonesia and many other emerging economies still have not recovered their strength from when they tanked last year, after the Fed first signaled it was scaling back its stimulus activities.

How long can the good times roll for the U.S. dollar? That depends on many factors, from the future growth of U.S. GDP to the health of the global economy and upcoming Fed decisions on interest rates. Yet with central-bank policy in the most advanced economies sharply diverging — the Fed tightening, the ECB and BOJ loosening — the dollar could see continued gains. Some economists believe the conditions are in place for an extended period of dollar strength, perhaps lasting several years. “The building blocks are still in place for a sustained dollar rally,” analysts at financial giant Barclays concluded in a recent report.

The fact remains, too, that no other currency has emerged to truly rival the dollar as the world’s No.1 choice. The uncertain stability of the euro was exposed by its multiyear sovereign-debt crisis and the chaotic response to it from Europe’s leaders. And even though Beijing has high hopes to transform the Chinese currency, the yuan, into an international powerhouse, policymakers there have been extremely slow to introduce the financial reforms that would make that a real possibility.

Of course, there are still long-term factors at play that could knock away the pillars of dollar dominance. Russia and China, for instance, recently pledged to settle more trade between the two nations in rubles and yuan. But for now, the dollar reigns supreme, as well it should.

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