Powerful Dollar Flexes Muscles Greenback Hits 4-Year High, Helps Cushion Stocks’ Slump

The dollar, the most visible symbol of American economic might, has reached the strongest levels in more than four years and may be putting a floor under the wobbly U.S. stock market.

A potent mix of rising domestic interest rates, economic anemia in Japan and the looming displacement of the German mark by an untested new European currency called the euro has helped increase global demand for dollars.

Foreigners are using those dollars to buy U.S. stocks, bonds and other assets that are delivering a greater return on their money than investments available in other countries.

The everyday changes wrought by the ups and downs of the dollar’s worth abroad can work subtly and slowly, so most Americans might not notice, unless they’re veteran international travelers familiar with exchange rates.

But forecasters who follow the dollar’s behavior say that at least for now, the dollar’s vitality - it hit the highest level against the yen Tuesday since August 1993 - is helping the U.S. economy more than harming it.

A stronger dollar not only attracts foreign capital to this country but represses inflation by making imports cheaper for Americans to buy. Were the dollar to weaken, foreign investors might put their money elsewhere and the currently benign rate of inflation might start to creep up. And that could undermine a stock market that’s still hurting from a 2-week downturn.

“You can’t say this is a bad thing,” said David DeRosa, managing partner at Quadrangle Investments in Greenwich, Conn. “It’s better for our capital markets and better for the inflation front.”

Nonetheless, the dollar’s rebound from postwar lows reached two years ago is worrisome to a range of American companies, particularly exporters like automakers and others who depend partly on sales overseas. While imports are cheaper here, American exports are getting pricier abroad.

The dollar’s ascent played a role in declining U.S. sales for the Big Three automakers in March, while European and Asian automakers enjoyed gains.