USD strength is killing me as I holiday in Ecuador

I’ve never lived in the USA. I work for an English company (British Pounds), grew up in Ireland (euro) and live in Colombia (Colombian Pesos). This is relevant because I want to discuss the strength of the US dollar, and why it is not what it seems.

Ecuador

I got to enjoy one of the perks of working for an English company the week before last, as a delightful four-day weekend came my way to celebrate the Queen of England’s 70^th year on the throne (“Platinum Jubilee”, to use the official term). I’m not a royal family fanboy, but I’ll certainly take the double bank holiday.

So, I booked a little trip across the border to Ecuador, where I’ve got to see not only scenery of breath-taking beauty, but also experience in person the immense strength of the US dollar.

Ecuador may not have its currency, but it has more than enough volcanoes to go round (and yeah…they’re clouds)

Dollar strength

Since 2000, Ecuador has used the US dollar following the abandonment of the sucre currency after an economic crisis and spiralling inflation – a familiar tale.

A lot has been made of the US dollar’s strength, and I’m witnessing it first-hand here. I bought the below coffee for $2.10, which equates to €1.96 – incredibly, the euro is nearly at parity with the dollar now. However, this time last year, the same coffee would have cost me €1.72, meaning the surge has cost me 14% in the last year.

Had I come here in on the eve of the Financial Crisis in 2008, the same coffee would have cost me €1.32. The US dollar has gone from €0.63 to €0.93 in that timeframe. For a tourist holidaying in a USD country, it’s a bitter pill to swallow.

The graph below shows this strength in graphical form. The DXY Index measures the dollar’s value against a basket of six other currencies (euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona). USD has been on a tear this year, up 8.3% at time of writing, meaning I’m forced to sample the local tap water here rather than indulge in my go-to agua con gas.

It’s not what it seems

This USD strength has been driving a lot of chatter, but it’s important to gauge what is actually happening here. The USD Index is relative to other fiat currencies, and they’re all weak right now. Sure, people are flocking to the dollar as the economy downturns; this is a natural consequence of a flight-to-quality and we have seen the same pattern historically. But look at the below graph, plotting the price of a number of basic items – eggs, chicken breasts, gas and bread – since the start of 2020.

So, while the narrative that the US dollar is strong is being circulated everywhere, the reality is that is only strong relative to other fiat currencies (unfortunately for any Bitcoin holders like me, I think it’s fair to say it is also strong relative to cryptocurrencies, too).

Inflation is rampant at the moment, with the dollar debasing as a result of the bonanza of money printing over the last couple of years. A hawkish Fed is being forced to raise rates to try restrain this inflation monster, with the dollar actually incredibly weak  – not strong.

For us non-Americans exposed to dollar costs, however, it’s even more brutal. So while the dollar is weakening at an alarming pace, it’s still strengthening relative to other fiat currencies – and it’s important to understand that distinction.

P.S – visit Ecuador!