U.S dollar reached equal standing with euro for the first time in two decades in the month of July.
Gatekeepers News reports that the U.S. dollar has incredibly appreciated against most major currencies in 2022.
This is coming as the central banks across the world continue to combat rising inflation.
In 2022 alone, the dollar is up 15% against the Japanese yen, 10% against the British pound, and 5% compared to China’s renminbi.
Also, the Wall Street Journal’s Dollar Index, which measures the dollar against 16 other major currencies, has recorded its best first half performance since 2010 this year, rising more than 10% year-to-date.
Although the dollar’s gains could help reduce the impact of rising inflation in the U.S., it can lead to some devastating outcomes for countries around the world, and it’s likely to be a major headwind for U.S. companies with operations overseas through the year 2022.
Many investors and consumers are, however, trying to unravel the reason the U.S. dollar has been so strong this year, and where is it headed next?
Multiple top Wall Street Chief Investment Officers and Strategists told Fortune that a new trend has emerged and is driving the dollar’s strength, but most argue the greenback will begin to drop by the end of the year.
The Chief Investment Officer at the Wealth and Investment Management Firm Bailard, Eric Leve told Fortune that “The dollar is strong because the Fed is in the midst of the most aggressive monetary tightening policy among major central banks in the world.”
Leve added that the Fed’s rate increases have pushed real yields on government bonds (or bond investors’ returns from interest payments after accounting for inflation) into positive territory for the first time in years, making U.S. bonds more attractive for investors around the world, thereby increasing the relative value of the dollar.
He further argued that the Fed’s rate increases have left the U.S. economy in a better place than many of its peers when it comes to inflation and recession risk.
The Fed’s actions also help to reduce inflation expectations (consumers’ and investors’ inflation outlook), which makes the U.S. more appealing to global investors that fear rising consumer prices.
The Chief Investment Strategist at the Investment Research Firm, CFRA Research, Sam Stovall, told Fortune that the dollar’s strength has been helped by this relative attractiveness. It’s a “flight to safety” for foreign investors amid global recession fears, he said.
The Head of Analytics at the Macro Data Analytics Firm Quant Insight told Fortune that this amounts to a “terms of trade shock,” where import prices have soared relative to export prices.
“If you are an energy importer, then this is hugely hurtful,” he said. “But if you’re an energy exporter, then actually you stand to benefit.”
Countries that export more energy and have more self-sufficiency in their commodity supply, like the U.S., have seen their currencies appreciate, while countries and regions without commodity self-sufficiency, like the E.U., have watched their currencies drop.
