The foreign exchange markets are incredibly complicated.
Local interest rates, monetary policy, trade balances, etc. are among the myriad factors that can cause one currency to move up or down relative to another.
But for anyone who can acknowledge the existence of foreign exchange, one thing is crystal clear: when your local currency appreciates, then it’s time to take that vacation abroad.
When your currency is strong and your destination’s currency is weak, everything you buy at your destination is suddenly priced at a discount.
Check out this chart from Renaissance Macro’s Neil Dutta. The grey line tracks the movement of the US trade-weighted dollar index. The maroon line is the net of foreign travel by US residents less foreign travel into the US by folks abroad.
It’s not a perfect relationship, but it’s a reasonable one. When the dollar gets stronger, there are more people travelling out of the US than into the US. It’s one of the more immediate examples of rational behaviour in the financial markets.
Like we said, foreign exchange is complicated. While a strong local currency is great for overseas travellers, importers, and tourism-driven economies overseas, it’s bad news for exporters and US multinational corporations doing lots of business overseas.
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