Dollar dominance: Americans vacationing abroad affects the US economy

Americans have eagerly engaged in a „revenge drive” since the lifting of pandemic-era restrictions, and the dollar’s recent surge has made it even more attractive.

Indeed, as more Americans travel to Europe, many cities are looking for ways to sustain more tourism. That’s because the Federal Reserve’s aggressive rate hikes and long-term stance have boosted the dollar against major global currencies, which have fallen as other central banks are expected to start cutting rates soon.

The U.S. dollar index, which measures the greenback against a basket of currencies, is up about 4% year to date and up 5.6% from a July 2023 low. The result is that the dollar goes a long way overseas, making foreign vacations less expensive. For Americans.

But U.S. tourism abroad is considered an imported service when calculating gross domestic product, which saw disappointing growth in the first quarter due to a wider trade deficit. In recent months, the share of service imports devoted to travel reached its highest level since 2005, according to a Wells Fargo note on Friday.

„On the services side of trade, the U.S. runs a trade surplus, so if foreign travel continues to pick up with a rising goods deficit, net exports will have a meaningful impact on real GDP growth,” the analysts wrote.

Wells Fargo calculated similar dollar strength from 2014 to 2015, with travel imports (Americans vacationing abroad) seeing about $1.1 billion in growth, while travel exports (foreigners vacationing in the U.S.) were little changed.

Of course, travel services worth $1.1 billion represented a 1.5% share of the total trade balance, the analysts added. But don’t let that small share fool you.

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„In short, growth in overseas travel may not be enough to move the needle massively in any given month, but over time, it will be a more consequential factor for net exports than currently appreciated,” Wells Fargo concluded.

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