The Almighty Dollar is showing the world who is the boss. The dollar has strengthened against nearly all other foreign currencies in the past year. The strong dollar is a reflection of better economic conditions and greater confidence in the U.S. versus the rest of the world. The dollar now carries a bigger purchasing power. But the impact is not necessarily positive.
Numerically, on average the U.S. dollar has strengthened by 11 percent in the past 12 months to February and even by more over the past few years. Against some currencies the gains have been even more dramatic. The U.S. Dollar is up 25 percent compared to recent years against the Canadian counterpart; up 17 percent against the Euro; up 47 percent against the Japanese Yen; and up by more than 100 percent against the Russian Ruble. In the simplest term this gain means Americans traveling abroad will see bargains everywhere and will be extra proud of their home country. For Americans staying at home, many of the foreign-made products at Walmart, for example, will be cheaper.
The strong dollar unfortunately will not translate into lower housing costs. Why? Land cannot be shipped across oceans and construction workers demand dollar compensation. That is why rents are rising at 3.4 percent, essentially at a 7-year high, and home prices are appreciating at more than 5 percent.
One way the stronger dollar will help the real estate market is that the interest rates can stay low for longer. The Federal Reserve will raise interest rates sometime this year. The date of interest rate hike is likely being pushed further away because the strong dollar has tamed inflation (outside of housing costs). Even with the likely delay by the Fed on rate hike, the mortgage rates will be on an upward path, reaching possible 4.5 to 4.7 percent by the end of the year (though not likely over 5 percent as previously forecasted before the dollar gains).
Today, the U.S. dollar is the unrivaled global reserve currency. Britain, about 100 years ago, had the global currency status where one British Pound could command $5. In the long distant past, Venice held the global reserve currency and thereby its economy flourished. The importance of the global reserve currency was noted by Shakespeare in his play Merchant of Venice. It would have been very easy for a short-term gain to simply default on the loan rather than pay … with a pound of flesh. But the Venetians knew that default on a contract meant that they would lose their global reserve currency status and end its economic prosperity. So there was to be no debasing or shaving of Venetian coins and the rule of law and not rule of passion was to be the mainstay of Venetian society.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.