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The rally in the dollar could in the short term lead to a drop in global trade, as well as the demand for dollar-denominated assets. The rise in the value of the dollar affects almost everyone, but what is driving the dollar’s rise and what does this mean for investors and families?
The value of the US dollar has been rising for more than a year against everything from the British pound to the South Korean won. The dollar is near its highest level in more than two decades against a key index that measures six major currencies, including the euro and the Japanese yen.
The rise of the dollar affects almost everyone. The values of currencies are constantly changing as banks, companies and traders buy and sell them in time zones around the world.
The US dollar index, which measures the dollar against the euro, yen and other major currencies, is up more than 14% this year.
Why is the dollar strengthening?
Because the world’s leading economy, the United States, is not slowing down.
Despite the highest inflation in four decades, the US labor market has remained remarkably strong, as have other areas of the economy, such as the service sector.
This has traders hoping that the Federal Reserve will make good on its promise to keep raising interest rates and hold them for a while, in hopes of reducing the price rise.
These expectations have contributed to the 10-year Treasury yield doubling to 3.44%, from 1.33% a year ago. Investors are looking to get more for their money, and those richer returns from the United States are attracting investors from around the world.
This is because other central banks have been less aggressive than the Fed because their economies appear to be more fragile.
Although American travelers may benefit from a stronger dollar in other countries, it is indirectly driving inflation that the United States ends up importing.
A stronger dollar may support commodity prices across the board. This is because oil, gold, and other commodities are bought and sold in US dollars all over the world. When the dollar rises against the yen, a Japanese buyer can get fewer barrels of crude oil for the same number of yen as before.
That may mean less upward pressure on oil prices.
A strong dollar also puts financial pressure on everyone. Many emerging market companies and governments borrow in US dollars, rather than their own currencies. When they have to pay their debts in US dollars, when they buy fewer and fewer dollars with their local currencies, this can put a lot of stress on those economies.
with AP
