Makro, inflace a sazby
The Strength of the Dollar and Its Impact on Global Markets
Key takeaways
- The dollar is the world's reserve currency — its movements affect commodity prices, debt, and equity markets worldwide.
- A strong dollar raises the cost of servicing dollar-denominated debt in emerging countries and pushes down commodity prices quoted in USD.
- Emerging markets suffer from a strong dollar more than developed markets.
- For a Czech investor in global ETFs, both the CZK/USD exchange rate and the currency risk carried by the fund matter.
- Macro context is an orienting framework — it is not a signal to time purchases and sales.
The dollar is the world's reserve currency, which is why its movements resonate across every asset class — from equities and bonds to oil and gold. When the dollar strengthens, the world takes notice.
Why Dollar Strength Matters
A large share of global trade and commodity contracts is denominated in dollars. A strong dollar means that for one unit of the US currency you receive more of everything — barrels of oil, tonnes of copper, or Brazilian reals. For exporters outside the US, this can be a problem: their goods become more expensive in dollar terms.
In addition, governments and companies in emerging markets have historically borrowed in dollars because they offered lower interest rates. A strengthening dollar then makes repaying these debts more expensive in local currency — a double squeeze on emerging markets.
Impact on Equities and Commodities
US companies with a large share of overseas revenues suffer from a strong dollar: translated revenues from abroad are lower. Importers, on the other hand, benefit. Commodities quoted in USD — oil, gold, copper — tend to fall in dollar terms when the dollar strengthens, because they have become more expensive for foreign buyers.
What This Means for the Czech Investor
If you invest in global ETFs denominated in Czech crowns, your return is affected by two exchange rates simultaneously:
- the value of the underlying assets in dollars (or euros)
- the movement of CZK against USD and EUR
Currency hedging neutralises the exchange rate risk but comes at a cost. Most long-term investors in global indices do not hedge their currency exposure and accept it as natural diversification. More on choosing ETFs can be found in the ETF guide section.
How to Use the Dollar Context
Instead of watching the DXY index daily, ask yourself a simple question: have the structural conditions under which I originally invested changed? If not, a short-term dollar swing is no reason to act. See also the article what is risk and how to measure it to understand the dollar in the context of overall portfolio volatility.
FAQ
Why does a strong dollar hurt emerging markets?
Emerging markets have historically borrowed in dollars. A stronger dollar means servicing that debt in local currency becomes more expensive. At the same time, a strengthening dollar pushes up the cost of imports and can fuel inflation.
Does the dollar affect my ETF held in Czech crowns?
Yes. Your return depends on both the value of the underlying assets and the CZK/USD or CZK/EUR exchange rate. Currency hedging reduces this risk but adds costs. Most long-term investors do not use hedging.
Should I sell my ETF in response to dollar moves?
Generally not. Dollar movements are part of normal market volatility. Short-term swings are not a timing signal. Sticking to your investment plan and regular contributions matters far more.