Why is the dollar so strong right now?

The rise in the dollar affects almost everyone, even those who will never leave the US

NEW YORK – The buck doesn’t stop.

The value of the US dollar has been trending higher against everything from the British pound across the Atlantic to the South Korean won across the Pacific for more than a year.

After rising again on Friday, the dollar is near its highest level in more than two decades against a key index measuring six major currencies, including the euro and the Japanese yen. Many professional investors do not expect the situation to ease any time soon.

The rise in the dollar affects almost everyone, even those who will never leave US borders. Here’s a look at what’s driving the US dollar higher and what it may mean for investors and households:

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In essence, a dollar can buy more of another currency than it could before.

Consider the Japanese yen. A year ago, 1 dollar could get a little less than 110 yen. Now he can buy 143. That’s about 30% up and one of the biggest moves the US dollar has made against any other currency.

The values ​​of foreign currencies are constantly shifting against each other as banks, corporations and dealers buy and sell them in time zones around the world.

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The US Dollar Index, which measures the dollar against the euro, yen and other major currencies, is up more than 14% this year. The gain looks even more impressive compared to other investments, most of which have had a dismal year. US stocks are down more than 19%, bitcoin has more than halved and gold is down more than 7%.


Because the US economy is doing better than others.

Despite high inflation, the US job market has remained remarkably solid. And other areas of the economy, like the service sector, have shown resilience.

That has helped offset worries about a slowing housing sector and other parts of the economy that do best when interest rates are low. That, in turn, has traders expecting the Federal Reserve to make good on its promise to continue raising interest rates sharply and hold them there for a while in hopes of crushing the worst inflation in 40 years.

Those expectations have helped the yield on a 10-year government bond more than double to 3.44%, from around 1.33% a year ago.


Investors who want to make more money with their money. And those juicier US yields are attracting investors from around the world.

Other central banks have been less aggressive than the Fed because their economies appear to be more vulnerable. The European Central Bank has just raised its key interest rate by the largest amount ever, namely by three quarters of a percentage point. But the Fed has hiked rates by that amount twice already this year, and a third is expected in the coming week. Some traders are even saying a whopping full percentage point hike may be possible after a hotter-than-expected US inflation report was released on Tuesday.

Partly because of this less aggressive bias, 10-year bonds across Europe and other parts of the world offer much lower yields than US Treasuries, such as Germany’s 1.75% and Japan’s 0.25%. When investors from Asia and Europe buy Treasuries, they have to exchange their own currencies for US dollars. This drives up the value of the dollar.


Yes. US travelers who spend 10,000 yen on dinner in Tokyo will spend 23% less dollars on a same-price meal than a year ago.

With the dollar soaring so far this year against everything from the Argentine peso to the Egyptian pound to the South Korean won, the dollar is going further than before in many countries.


no A stronger dollar is also helping US buyers by keeping import prices in check and pushing down inflation.

For example, when the dollar rises against the euro, European companies earn more euros for every $1 in sales. With that cushion, they could lower the dollar price of their products and still make the same amount in euros. They could also leave the price in dollars and pocket the extra euros, or they could find a balance between the two.

Import prices fell 1% mom in August after falling 1.5% in July, offering some relief amid the country’s high inflation. For example, prices for imported fruit, nuts and some peels fell 8.7%. They have fallen by 3% compared to the previous year.

A stronger dollar can generally keep commodity prices in check. That’s because oil, gold, and others are bought and sold in US dollars around the world. As 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.


no US companies selling overseas are seeing their profits come under pressure.

At McDonald’s, summer revenue fell 3% year over year. But if the value of the dollar had simply stayed flat against other currencies, the company’s sales would have been 3% higher. Microsoft, meanwhile, said changes in foreign currency values ​​lost $595 million in revenue last quarter.

A number of other companies have issued similar warnings recently, and further gains in the dollar could put pressure on earnings. According to FactSet, companies in the S&P 500 Index generate around 40% of their sales outside of the United States.


A strong dollar can put financial pressure on developing countries. Many companies and governments in such emerging markets borrow in US dollars rather than their own currency. Having to pay off their debt in US dollars while buying their own currencies fewer dollars by the day can cause a lot of stress.


The dollar’s biggest moves may be behind it, but many experts expect the dollar to stay that way for at least a while.

Tuesday’s US inflation report shocked the market and showed that it remains more resilient than expected. This is causing traders to increase their bets on next year’s Fed rate hikes. Fed officials have been busy recently reaffirming their pledge to keep interest rates high “until the job is done” to curb the country’s high inflation, even if it hurts economic growth.

This trend towards even higher interest rates from the Fed should continue to support the value of the US dollar.

Strategists wrote in a report by BofA Global Research that the dollar could weaken significantly: “The Fed needs to be more concerned about growth than inflation – and we’re not there yet.”

https://www.king5.com/article/news/nation-world/strong-dollar/507-1f3a6712-71de-4182-9b32-e74481285533 Why is the dollar so strong right now?

Alley Einstein

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