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Why is the US dollar extremely strong right now

September 06, 2022
Why is the US dollar extremely strong right now

The value of the US dollar against other major currencies has reached its highest level since the early 2000s. Even as recession fears mount and the economy shows signs of slowing, the dollar continues to surge.

The basic explanation for the strong dollar boils down to this: While things might be weird in the US economy right now, a combination of factors has made the dollar a better bet for investors than most other currencies.

The dollar has been rising in large part because the Federal Reserve is on track to increase interest rates faster than other major countries, said Kenneth Rogoff, an economics professor at Harvard University and a former chief economist at the International Monetary Fund.

The central bank started to lift interest rates in March after keeping them at near zero for much of the pandemic, and carried out another big rate increase on Wednesday, raising rates three-quarters of a percentage point. Higher interest rates make the dollar more attractive to investors, since it means they would get a bigger return.

Russia’s invasion of Ukraine has also strained European economies and made natural gas prices skyrocket, making the US economy look healthier in comparison, Rogoff said.

“Everyone’s talking about a recession, but the US economy is doing better than a lot of other economies,” he said.

The dollar is acting as a “safe haven,” said Vassili Serebriakov, a foreign exchange strategist at UBS, an investment bank. As the growth outlook for the world economy worsens, investors have grown more concerned and flocked to the dollar, putting their money into safer assets like US Treasury bonds, Serebriakov said. That in turn has pushed up the currency’s value.

“More recently, it has less to do with the US and more to do with a global downturn,” Serebriakov said. 

For other countries, a strong dollar pushes import prices up, which can create inflation in those regions. The impact can also be brutal for emerging economies.

When US interest rates are low, global investors tend to invest more in emerging markets, or the economies of nations that are transitioning into developed economies. But when rates start to rise in the United States and the dollar climbs, money starts to flow out of those countries, Wessel said.

Some developing nations are better equipped to handle this ,since they have more reserves or their exports are priced in dollars and have been rising in value, but other countries could struggle. 

Countries that borrow heavily in dollars could suffer because it becomes harder to make repayments as the dollar rises and their currencies depreciate, said Mark Sobel, the U.S. chair of the Official Monetary and Financial Institutions Forum and a former top Treasury Department official.

“That means the amount of dollars they need to get their hands on to make repayments goes up,” Sobel said.-vox.com

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Last modified on Tuesday, 06 September 2022 16:29
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