In the past year, we have seen the dollar strengthening massively. The US dollar has been on a major surge against leading global currencies. Recently the dollar hit levels which
it had not been seen in the past 20 years. It has gained 15 % against the British Pound, 16%
against the Euro and 23% against the Japanese Yen. The dollar is the world’s reserve currency, which means it is used in most international transactions and as a result, any change in its value has a significant impact on the entire global economy; envisions Prithviraj Kothari, the bullion king of India.
In such volatile markets, 3 main questions that come to our mind are-
Why has the dollar strengthened?
What impact is it creating?
Answering the first question- Well there are two main reasons- Economic and Geopolitical-:
- ECONOMIC- The Central bank of the US- The Federal Reserve- has been hiking interest rates aggressively and also reserving its policy of creating money by Quantitative Easing (QE). This is with a view to curbing inflation caused by Covid supply issues, the war in Ukraine and QE. The stronger US dollar is a side effect of these higher interest rates. Because the dollar now offers a higher yield when deposited in a US bank, it encourages foreign investors to sell their local currency and buy US dollars.
- Geopolitical (Dollar Parity)- the other reason for the surging US dollar is because it is a traditional safe haven when the world is worried about a recession- and the current geopolitical. The situation is arguably making it still more appealing. The Euro has suffered from the European Union’s proximity to the war in Ukraine, its exposure to Russian energy and the prospect of another Eurozone crisis. It is closest to dollar parity for the first time since its early years.
A rising US dollar will have the following impact:
- High Inflation- Petrol and most commodities are usually traded in US dollars. So, these items tend to get expensive in the local markets as they are priced against the dollar.
- The threat faced by low-income countries- Many developing countries owe their debts in US dollars, hence the amount they owe now is much more.
- Bigger US trade deficit- Since goods priced in the US dollar will get expensive, other countries won’t buy them resulting in a bigger trade deficit for the US economy,
- Fears in the Euro Zone- the strong US dollar is creating pressure on the European Central Banks to raise their own interest rates to prop up and subdue the cost of imports including energy, thus putting more pressure on the Eurozone
- Breaking Precious Metals and Equities market- Furious mega rise in USD at 22 years high at 108.3. The single reason that global equities and metals are under stress despite -20% to even – 35% deep cuts. Already seen in just six months.-NASDAQ slipped more than 2% on Monday, 11th July with DOW and DAX remaining weak. Gold and silver started breaking Monday’s low and may exhibit more weakness as the dollar surge continues.
Strength in the dollar makes greenback-priced gold more expensive for buyers holding other currencies. “It is difficult to predict the future direction of the US dollar especially when there are so many moving parts in the world economy”, quotes Prithviraj Kothari, the bullion king of India. Looking forward, fears of an economic slowdown appear crucial support and hence converses surrounding the same will be essential to track ahead of important data releases from The US.