Compared to other major currencies, the US dollar is the strongest currency in two decades. This means that buying dollars is more expensive and the dollar will buy more than the pound, euro, or yen. This has affected businesses and households around the world.
How strong is the dollar?
The Dollar Index (DXY), which measures the US dollar against six other major currencies including the euro, pound, and yen, is up 15% in 2022. By this measure, the dollar is at a 20-year high.
Why is the dollar so strong?
The US Federal Reserve has raised interest rates several times this year to try to control rising prices. This makes borrowing money more expensive. It also means you get more returns on financial products like US government bonds, making them more attractive to investors. Bonds are a way for governments to borrow money that is very safe and promises to be paid back with interest in the future.
In July 2022 alone, foreign investors bought $10.2 billion in US government bonds and now own $7.5 trillion of them. In order to buy these bonds, investors must buy dollars and that demand increases the value of the dollar. When investors sell other currencies to buy dollars, they fall in value. The pound has fallen against the dollar after the UK government announced major tax cuts. Because the size of the United States makes its currency a "safe haven," investors also tend to buy dollars when the global economy is under pressure, and for that reason, the value of the dollar increases.
Many economies in Europe and Asia are facing problems as a result of rising gas prices due to the Ukraine conflict. The US has not been greatly affected by rising energy prices. Although its economy has contracted over the past six months, businesses are still taking on new staff, seen as a sign of continued confidence. However, the strong dollar hurts US companies that earn money from the rest of the world, such as Apple and Starbucks. US companies trading on the S&P 500 stock market index are thought to be losing $100 billion in international sales.
How does a strong dollar affect countries with weaker currencies?
Countries with weak currencies can benefit from a strong dollar by boosting their exports and providing goods and services to the United States more cheaply. However, it means that the prices of goods imported from the United States will increase.
Since the price of oil is calculated in US dollars, fuel prices are high in many countries of the world. In Kenya, for example, the shilling has fallen to a record low against the dollar, and fuel prices have increased by nearly 40% since the start of 2022. Governments and private companies in many countries also often borrow money in US dollars rather than their own currencies. That's because it's more stable.
As the dollar appreciates, those loans become more expensive than paying them off in local currency. Argentina's government has been particularly hard hit by the strength of the dollar. In an effort to protect its financial reserves, various imports including pleasure boats and whiskey have been temporarily banned.
What happens to foreign workers who earn dollars?
Every year, people working abroad send $625 billion back to their families. These remittances have a positive impact on the local economy. In the United States alone, foreign workers remit $150 billion a year, including $30 billion to Mexico, $16 billion to China, $11 billion to India, and more than $11 billion to the Philippines. The stronger the US dollar, the more other currencies it can buy. This is a great saving for recipients of dollar-based remittances.
Bernadette Cruz is a woman living in San Jose, Philippines with her three sons. The family depends on dollars sent home from New York by her husband, Fred, who has been a nurse for the past 18 years. The dollar rose 13.5% against the Philippine peso. "The prices of all goods, including food and services, are rising in the Philippines," says Bernadette. "But the high value of the dollar will go a long way in helping us afford the things we need. This extra money adds value to my husband's sacrifice of being abroad.
What are countries doing to cope with the strong dollar?
Many countries around the world are trying to increase the value of their currencies by raising interest rates. Argentina's central bank prime rate is currently 69.5%. It is 19% in Ghana, 14% in Nigeria, and 13.75% in Brazil. However, higher interest rates mean that borrowing money is more expensive for businesses and households. Businesses may face expansion problems and may lay off their staff. Family maintenance expenses can be deducted. On the other hand, this could lead to the economies falling into recession.
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