Compared to other major currencies in the world the US dollar is currently at its strongest in more than 20 years, which means that buying dollars is becoming more expensive once morest the British pound, the euro and the yen, as a result businesses and households around the world will be affected.
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The US dollar index roseDXYBy up to 15% from the beginning of 2022 until the end of September, the US Dollar Index is an index that measures the average value of the US dollar once morest six other major currencies including the Euro, the British Pound and the Japanese Yen.
Where does the dollar’s strength come from?
The Federal Reserve raised interest rates several times this year in an effort to curb price hikes. The move pushed borrowing costs forward, meaning higher yields for financial products such as US government bonds made them more attractive to investors. Bonds are a way for the government to borrow money and the government pledges to pay The interest of the bonds in the future So bonds are generally considered a safe investment.
In July 2022 alone, foreign investors bought 10.2 billion US government bonds, and as many as 7.5 trillion US bonds were owned by foreign investors, and investors had to buy dollars to buy these bonds, which in turn led to an increase in the value of the dollar. Currencies are falling.
Investors tend to buy dollar The US is when the global economy is under stress, as the huge market size in the US makes it a “safe haven”, and this is also what makes the dollar rise.
In contrast, the rise in natural gas prices caused by the conflict in Ukraine has left many economies in Europe and Asia struggling, and this has strongly affected the performance of their currencies, as the euro fell below parity with the dollar, hitting its lowest levels in 20 years, and the pound sterling fell to its lowest level ever.
But the US is not yet alarmed by the rise in energy prices. While the US economy has been contracting for two consecutive quarters, companies are still hiring more workers, which is seen as a sign of continued confidence in the US economy.
But a strong dollar can also hurt US companies that make profits overseas such as Apple andStarbucksIt is believed that US companies listed in the Standard & Poor’s 500 Index might lose $100 billion in international sales.
Could a continued rate hike lead to a sending dollar index to 121?
present a meeting Federal Reserve Bank For September, a new increase of 75 basis points, the fifth in a row for this year, and the third in a row of this size, raised the federal funds interest rates to a range of 3% to 3.25%, and Bank President Jerome Powell indicated additional increases and a path “ Painful” to return inflation to normal, following the decisions of the Reserve Bank, the dollar index rose to its highest point since June 2002, exceeding the 111 points mark, to settle above 114.
In its new economic forecast, the bank lowered its previous June forecast for economic growth in 2023, while raising estimates for both inflation and unemployment, and forecast interest rates to reach 4.6% next year.
As a direct result, the Federal Reserve will maintain its very tight monetary policy for an extended period of time in order to achieve its goal of price stability, and this will likely continue to increase the attractiveness of the dollar as spreads widen. interest rates and increased risk aversion in global markets.
In the absence of a shift in the position of the Reserve Bank, the dollar might continue to benefit from the path of higher interest rates. In addition, the “painful path” taken by the head of the Bank of reducing inflation to around 2% with increased unemployment and reduced growth risks increasing aversion to Risk in global markets and increased demand for safe assets such as the dollar.