The Strong US Dollar - how does it impact the world?
With the skyrocketing inflation in the US, the Federal Reserve, the central bank, has adopted an extremely tight monetary policy stance, which has led to the strengthening of the US dollar.
A strong dollar is referred to the relative value of US dollars in the international foreign exchange market against a basket of other currencies. A value of country’s currency is dependent on many factors; including the economic fundamentals of the economy, and the relative strength of other economies as well.
With the poor performance in the global stocks, bonds, real estate, and even cryptocurrencies, and also with the rise in global inflation, one thing that has gone up definitely is the value of US dollars. The US dollar index, which measures the relative strength of the dollar against a basket of other currencies, has gone up nearly 17% within this year, according to Forbes.
With the skyrocketing inflation in the US, the Federal Reserve, the central bank, has adopted an extremely tight monetary policy stance, which has led to the strengthening of the US dollar. The Fed has raised its funds rate from near zero at the beginning of this year to a range of 3 percent and 3.25 percent in September 2022. Still higher rates are expected for the rest of the year.
While the US dollar is strengthening relative to the euro and the sterling pound, and other currencies; most European economies are also bearing the brunt of the Russia’s war in Ukraine, with the higher energy costs.
In addition to this, with other major economies facing the risk of economic recession; including China and Japan, the greenback becomes a natural safest bet around. This means investors selling off their holdings of other currencies and buying up the US dollar.
How strong is the dollar?
While the US dollar index gives us an aggregate value of the relative strength of the US dollar, it is always preferred to have an insight into how strong the dollar is compared to other major currencies.
The relative values of US dollar compared to other major currencies on 17 October 2022:
EUR/USD: One euro = $0.97
GBP/USD: One Sterling Pound = $1.12
USD/JPY: One US dollar = 148.67 Japanese Yen
USD/CHF: One US dollar = 1.00 Swiss Francs
USD/INR: One US dollar = 82.36 Indian Rupees
While one might think that a stronger dollar will be something good for the American economy, it may not be the case always. The US exports priced in US dollars will now be expensive for other countries, making US exports less competitive.
Similarly, other exporting countries with their depreciated currencies, will find their exports more competitive as for other countries the goods will be now cheaper.
In addition to this, US companies earning revenue from investments in other countries, will be receiving such revenue in the respective country’s currencies. Such earnings will now be lower in value.
