What's going on?

The US dollar hit its highest value versus other major currencies since 2003 on Thursday (tweet this) � and higher US interest rates have a lot to do with it!

What does this mean?

On Wednesday, the US Federal Reserve (�the Fed�) raised its target interest rate for only the second time since the 2008 financial crisis � and, in what the market interpreted as an important development, it increased its expectations for further interest rate increases next year. Higher interest rates typically lead to an increase in the value of a country�s currency as international investors flock to that country in search of higher returns (click here for a longer explanation).

Why should I care?

The bigger picture: A stronger US dollar creates a headwind for US companies.
A stronger dollar hurts some US companies as it makes it more difficult for them to sell their products abroad. Conversely, that�s good for manufacturers in places like Germany and Japan, who compete with American firms. Also, US-based companies with international operations might face a hit to their profits as sales made overseas are worth less when translated back to US dollars. Both of these factors create headwinds for many US stocks.


For markets: A stronger US dollar also creates some global risks.
Many emerging market (EM) countries have borrowed a significant amount of US currency in recent years. As the dollar goes up in value, it becomes more difficult for them to pay back that debt (because their income is usually generated in their own local currency) � which is negative for EM investments. Also, one major risk on investors� minds is that a lot of Chinese people and companies are still trying to sell out of the Chinese yuan and, in return, buy other currencies. A strengthening dollar could give the impression that moving out of the yuan (and into the dollar) is more urgent � and lead to even greater downward pressure on the yuan�s value. As discussed previously, the risks associated with a major yuan devaluation are significant.