A strong dollar's pros and cons

A rising greenback benefits U.S. travelers and could slow inflation, but multinational firms may suffer.

- By Sandra Block

If you treat yourself to a trip to Paris for the holidays, you'll pay less to toast the New Year than you would have last year. But don't expect your friends in France to join you in the celebration. The dollar is the strongest it has been in decades against the euro, British pound and Japanese yen. Many emerging-markets currencies have plummeted to all-time lows against the dollar. Over the past year, the dollar is up 18% against a basket of foreign currencies, as measured by the U.S. Dollar Index (DXY).

The euro recently dropped below parity with the U.S. dollar for the first time since 2002 (in mid September, the euro and the dollar were equal). If nothing else, this makes budgeting easier for Americans who are traveling in Europe: You'll no longer have to convert euros to dollars to figure out how much a nice dinner will cost in Rome or Barcelona.

Global travelers can thank the Federal Reserve, which has been raising interest rates in an effort to combat inflation. Higher rates make investments in Treasury bonds more attractive to investors, increasing the value of the dollar.