Discover more from Understandably by Bill Murphy Jr.
Prices are rising, but here's a tantalizing way to find travel right now. Also, 7 other things worth knowing today.
My next door neighbors are on vacation in Spain this week. (Everyone say Hola!) They picked a heck of a time to travel, of course, because while inflation is at levels many of us haven’t seen in a long time, the U.S. dollar and the Euro are basically at parity right now for the first time in two decades: $1 equals €1.
As it happens, I’d been talking recently with Kim Iskyan, an experienced and talented financial writer, who is in a unique position to dive a bit deeper on what this news means for Americans (and for the world, but we’re mostly an American newsletter.)
I asked Kim to explain. Here’s what he has to say:
Summer in Madrid
by Kim Iskyan
I’m American and I live in the U.S., but I grew up in Spain. Earlier this month I visited Madrid for a high school reunion. For a change—in this era of 40-year highs in inflation, $1.50 Snickers bars, and $5/gallon gas—the good old greenback felt downright muscular.
I’m talking about “equality” of the U.S. dollar. Last week, for the first time since 2002, the U.S. dollar and the European euro achieved parity: $1 equals €1.
Dinner at a café at a buzzy downtown sidewalk restaurant in Madrid set me back $50 (or €50). The Rioja, the setting sun, the chorizo, the paella—it’s as priceless as those MasterCard ads would have you think.
It’s also a lot more than I’d get for my money where I live, near Washington, D.C.
Don’t get me wrong. Madrid’s no bargain in general. But thanks to U.S. dollar-euro parity, it’s a lot cheaper for Americans in Europe than it’s been for years.
Last summer, it took around $1.20 to buy one euro (the European currency hit an all-time high against the dollar of $1.60/€ in July 2008). So right now Madrid—and the rest of Europe for that matter—is at around a 16% discount compared to last year.
Like most everything else (outside of controlled economies, that is), currencies move according to demand and supply. When there are more buyers than sellers of a stock, the price goes up. Similarly, in recent months there have been more buyers than sellers of U.S. dollars.
Currency markets are huge… about $6.6 trillion (with a “t”) in foreign exchange is traded globally every day. That’s 34 times greater volume than the Nasdaq, for example. So it takes a lot for the dollar to gain on the euro—so much, and so fast.
Why has the euro lost steam? Probably three reasons:
Europe’s economy is facing major strain due to the Russia-Ukraine war, and the real prospect of an energy shortage this winter.
Interest rates are a big factor. The Federal Reserve, America’s central bank, has been steadily increasing interest rates (to 1.50-1.75%, so far) in an effort to tackle inflation.
Meanwhile, the European Central Bank, even though EU inflation is nearly as high as that in the U.S., hasn’t begun to raise interest rates. It will likely start soon, but for now, the eurozone still has negative interest rates.
As a result, rate-sensitive investors around the world—and there are a lot of them—have been selling the negative-yielding euro, and buying the positive (and rising)-yielding dollar.
What’s more, investors tend to buy the dollar and U.S. Treasuries during times of rising uncertainty. Concerns about the health of the world economy, increasing prices, and the Russia-Ukraine war have also boosted the dollar.
It’s not just the euro that’s lost ground. The Japanese yen is down by around a quarter over the past year against the dollar. The British pound is at two-year lows against the dollar. It’s a similar story for dozens of other currencies around the world.
A strong dollar means that imported goods here in America are cheaper. (In the same way, buying local goods—say, if you’re visiting Madrid—is cheaper, too.)
But there are two sides to the story. A strong dollar means that American-made goods are most expensive for people who are buying with other currencies. A Made-in-USA item that Mr. Foreigner could buy a year ago in his local currency for the equivalent of $100, now costs him $110, $120, or more.
If the dollar continues to strengthen, that could be bad for American exporters, since demand will drop as (local) prices rise.
In the meantime, how can you take advantage of the big-man-on-campus U.S. dollar?
Hop on a plane, passport in hand, and go abroad (Madrid is lovely this time of year!) for a big discount.
If you’ve ever thought about buying real estate abroad, around now would probably be a good time to look more carefully. Or considering buying the shares of European companies, through an ETF, for example.
The dollar could continue to strengthen. But markets tend to overcorrect, and the supertankers that are the foreign currency markets have moved a long way, very fast.
In other words, things tend to revert to the mean, and that means chances are good that the dollar will weaken in coming months. So you’ll probably want to book that European tour sooner rather than later.
Hit me up if you want my best Madrid paella place.
7 other things worth knowing today
OK, on the other hand: Weather in Europe is crazy-hot this summer, and France, Spain and Portugal are battling wildfires. Most of the U.S. is also hot, except for those of us "blissfully" (their word in the article) living in New England and the mid-Atlantic. (Weather.com, WashPost)
Jim Thorpe has been reinstated as the sole winner of the 1912 Olympic pentathlon and decathlon in Stockholm—nearly 110 years after being stripped of those gold medals for violations of strict amateurism rules of the time. The International Olympic Committee planned to announce the change Friday on the 110th anniversary of Thorpe winning the decathlon and later being proclaimed by King Gustav V of Sweden as "the greatest athlete in the world." (CBS News)
A report released Sunday by the Texas House Committee investigating the May 24 shooting at Robb Elementary School in Uvalde found “systemic failures and egregious poor decision making” among officers during the incident, which left 21 children and adults dead. The report explained there were 376 law enforcement officers on the scene, but many of the officers were unsure who was in charge. The report added that radio communications were ineffective amongst the various agencies. (Texas Public Radio)
Nicholas Bostic, 25 from Lafayette, Indiana, is being recognized as a local hero for saving five children on Monday, including a 6-year-old girl, who by then was stuck in a house engulfed in flames and filled with a "black lagoon" of smoke. "If it wasn't for Nick's actions, these children would not be alive today," said Chief Richard Doyle of the Lafayette Fire Department. (Insider)
You can now ask Google to remove your personal data from its search results. Here’s how. (CNBC)
According to a new poll, a majority of people who voted for President Trump and live in Republican-controlled states say secession would make things better in their states. While noting this is a majority of a minority, it's still striking. (Mediaite)
One roommate is 85, the other is 27. Such arrangements are growing. "We’ll be friends for life," Siobhan Ennis said of her roommate, who is 58 years her senior. (WashPost)
Thanks for reading. Photo credit: Unsplash. Want to see all my mistakes? Click here.