Today's Viewpoint: A MarshBerry Publication

THE U.S. BUCK STOPS HERE: HOW THE STRONG U.S. DOLLAR COULD SLOW GROWTH AND IMPACT INSURANCE BROKERS

While a strong U.S. dollar is an indicator of the relative strength of the U.S. economy vs. the rest of the world, it poses some challenges both domestically and globally.

As of September 29, 2022, the U.S. dollar is at a record high compared to other major global currencies. The dollar has strengthened this year relative to other currencies, largely due to the Federal Reserve’s aggressive rate hikes, investors seeking safety in dollar-denominated assets given rising global economic and political volatility, and the stronger performance of the U.S. economy vs. other countries.

A strong U.S. dollar may help companies and individuals who are purchasing (or importing) goods or services from foreign countries, in foreign currencies. However, it may not be so good for everyone else, including companies with overseas revenue. Just like inflation impacts the cost of U.S. products for Americans, so does it impact the cost of U.S. goods internationally. And when foreign currency loses value against the U.S. dollar, it compounds the problem for other countries’ economies.

Several global currencies reached record lows against the dollar in September. The Japanese yen reached a 24-year low, while the British pound fell to its lowest-ever level vs. the U.S. dollar on September 26. The U.K. pound dropped after its government announced a spending plan, including large tax cuts, that sparked fears of higher inflation. A few months earlier, the euro fell to parity with the dollar for the first time in almost 20 years.  

Some governments have intervened to support their currencies. On September 22, 2022, the Bank of Japan intervened for the first time since 1998, spending $19.4 billion to prop up the yen, on concerns that the drop in the yen could impact economic stability. Other countries are also stepping in: China’s central bank ordered state-owned banks to buy yuan and sell dollars to support the Chinese currency. The yuan lost over 11% in 2022 vs. the dollar and is set for the largest yearly loss since 1994.

Beyond contributing to economic instability in foreign countries, the record strong U.S. dollar could also be detrimental to U.S. gross domestic product (GDP), as U.S. goods become more expensive abroad, reducing U.S. exports. As exports decrease and imports increase, the trade imbalance and U.S. economic growth slows. Furthermore, a stronger U.S. dollar contributes to higher inflation, which in turn encourages a continued hawkish monetary stance from the Federal Reserve. This is also contributing to slower growth. 

The impact a strong U.S. dollar may have on the insurance industry

U.S. companies, including public insurance brokers and carriers, with exposure overseas will see their profits negatively impacted because of the strong dollar. For example, Marsh & McLennan (MMC) noted on its 2Q22 earnings call that “foreign exchange was a headwind of $0.03 to our adjusted EPS due to the strength of the U.S. dollar…Year-to-date, foreign exchange represents a $0.07 headwind.” Furthermore, European and U.K. reinsurers could also have larger loss burdens because of their weakening currencies (some up to 20%+) against the U.S. dollar, which may contribute to their challenges around losses related to Hurricane Ian and other natural disaster events. 

George Saravelos, Deutsche Bank’s head of foreign exchange research, suggests that if the Federal Reserve slowed down its aggressive tightening cycle, that would help slow the unprecedented strength in the dollar. Other factors that would likely alleviate the rally on the dollar include less energy uncertainty in Europe, and a shift in China’s zero-COVID policy that is disrupting supply chains and adding to the global slowdown. However, Minneapolis Federal Reserve Bank President Neel Kashkari hinted on September 27 that the Fed would continue to be hawkish around monetary policy to fight rising inflation, stating, “The U.S. central bank needs to tighten monetary policy until underlying inflation is declining, and then wait to see whether it has done enough.” 

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