Despite signs of trouble in the U.S. economy, including soaring inflation, falling stock prices and faltering consumer confidence, one important indicator is showing America’s strength: the dollar.
Even as the Dow fell, the Wall Street Journal dollar index remained firm, up 8% this year. The U.S. dollar has appreciated 7% once morest the yuan, with most of the gains in the past month. The dollar has climbed 12% once morest the yen and 10% once morest the Swiss franc over the same period.
Changes in exchange rates have important economic implications. A stronger currency in a country should make it cheaper to import goods, which should help curb inflation. From this point of view, the appreciation of the dollar will make the Fed’s job a little easier, and may dilute the Fed’s urge to aggressively raise interest rates to dampen demand and prevent consumer prices from rising.
The strength of the dollar is supported by a number of factors. Interest rates in the U.S. are significantly higher than elsewhere in the world. For example, 10-year U.S. Treasuries yield 2.9%, compared to 10-year German bunds, British bunds, and Japanese bunds, which yield 0.95%, 1.7%, and 0.2%, respectively. Higher returns make investors willing to put their money in the United States.
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