A historic event took place in the foreign exchange market in mid-July of 2022, as the soaring U.S. dollar traded at parity with the Euro. This level was only been hit once before, and that was over two decades ago.
An experienced finance expert, Kavan Choksi, mentioned that 2022 had been especially quite a historic year for the United States dollar. This currency keeps surging up, almost 17% so far, against an index of a basket of currencies. This is an exceptional currency move, with every few previous periods mirroring that kind of strength over such a short period of time.
Kavan Choksi briefly talks about the factors influencing the growing strength of USA dollar
Among other things, the sudden heightened geopolitical uncertainty prompted by the Russian invasion of Ukraine is a critical factor that contributes to the surge of the U.S. dollar. The geopolitical situation gives rise to a phenomenon referred to as “fight-to-quality.” This basically means that if a war was to break out, the United States would be the country most likely to prevail due to its unmatched military might. As a result, its currency shall be the safest bet.
The United States dollar is a currency that drives international trade. As a result, its huge rise in 2022 has left major consequences by driving up the costs of food imports, as well as heaping losses on bond and stock investors. The greenback currency stands at a record high and is likely to remain the same to keep driving interest rates up to quell inflation. Straightforward international interest rate arbitrage, driven by the much higher interest rates that have been prevailing in the U.S., has also been instrumental in increasing the strength of the dollar. The Fed has been raising interest rates aggressively in order to battle startling levels of rising inflation in the nation.
The turgid ascent of the United States currency influences a large part of the world, as it, in many ways, is the lubricant for global commerce. Around 40% of the $28.5 trillion in annual global trade is priced in USA dollars. Kavan Choksi highlights that the demand for the U.S. dollar has been really hot due to the fact that global markets have become uncertain; investors tend to look for a safe haven. Uncertainties are especially high at the moment in regard to Ukraine and Taiwan. Hence, the security desired by investors is now fulfilled primarily by the U.S. dollar.
There seems very little on the horizon that can break the climb of the dollar. The Japanese yen is around 148 to the dollar, and therefore being traded at a record low. This situation is largely due to the fact that the Bank of Japan has failed to follow the Fed by raising the interest rate. Japan does not have any such prevalent inflation. In fact, the country has been dealing with deflation for many years. The bottom of the British pound has also fallen out and hit a record low of 1.03 to the dollar recently. Almost all of Europe is additionally facing major issues owing to a historic surge in energy prices that is likely going to need major subsidies by governments. These governments subsequently might need to borrow large sums of money in order to ease the burden of energy price increases for their citizenry.
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