2024-04-21 19:57:00
(CNN) — The mighty US dollar strengthened last week, in a positive sign for Americans’ purchasing power.
The US dollar index, which measures the currency’s strength once morest six of its peers, closed Tuesday at 106.26, the highest level since early November. The remarkable strength of the US economy is one of the main reasons for the dollar’s rise in the past week.
The latest retail spending data released on Tuesday showed Americans continuing to open their wallets, and other figures released earlier this month showed the US labor market remains strong and the country’s manufacturing sector is expanding.
Federal Reserve officials said the economy’s resilience allowed them to keep interest rates at their highest level in 23 years, pending more evidence that inflation is moving toward its 2% target. The central bank cuts interest rates if it is clear that the economy is contracting, as it is also responsible for maximizing employment in addition to stabilizing prices.
However, there are signs that the cooling of inflation has stalled. March was the third consecutive month in which inflation exceeded forecasts. Overall inflation has recently been reinforced by the rise in petrol prices and the sustained increase in housing costs.
Federal Reserve Governor Michelle Bowman suggested in a speech on Wednesday that the central bank may have to raise interest rates once more or further delay the first rate cut, since “there is a lot of activity in the financial markets and a lot of continued growth that we would not have expected regarding the policy was sufficiently restrictive.”
But the strength of the US economy is not the only thing that has lifted the dollar.
Before the clock spoke with Claudio Irigoyen, head of global economics at Bank of America, regarding the rise of the dollar and what it means for Americans and the world.
This interview has been edited for clarity.
Besides the resilience of the US economy, what is driving the dollar’s rally?
Claudio Irigoyen: The dollar is strengthening for a combination of reasons. It’s not just that the Federal Reserve said it won’t cut interest rates anytime soon that’s causing markets to rally. It is also that the US economy is doing better than the rest of the main regional blocs, including the Eurozone. Most of the growth surprises still come from the US.
It’s also because whenever there’s a geopolitical shock, there’s a flight to quality components, which helps the dollar. And if the events continue to happen in the Middle East, these shocks will lead to an increase in energy prices, and these shocks have a proportionally larger effect in Europe and Japan, but not so much in the more energy independent United States.
What does a strong dollar mean to Americans?
For Americans, the purchasing power of the dollar is greater and consumption will remain strong. People will probably travel more abroad. Imports are cheaper, so they will import more. But obviously, if that happens, the rest of the world will gladly finance the country’s current account deficit. (A “current account” is a record of a country’s transactions with the rest of the world, including imports, exports, payments and other transfers. And a deficit occurs when spending exceeds production, leading to net imports).
What does the rise of the dollar mean on an international scale?
That’s not necessarily bad for other economies, because if you have a weaker currency, that should help your exports, and that’s how you rebalance the global economy. However, the strength of the dollar is not an exogenous shock, but rather an endogenous market reaction to the fact that the US is doing better than the rest.
I don’t think you’re going to get a weakening of the dollar until there’s more convergence in growth or monetary policy. There is a very narrow area in which the dollar can weaken, and it usually happens when China, relative to the trend, is doing better than the US. Despite better-than-expected first-quarter numbers in China, we’re not seeing it yet. And once more, geopolitical risks must disappear from the map, but all indications are that between now and the US election, geopolitical risks will remain.
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