What a Strong US Dollar Means for the World

The U.S. dollar, the world’s premier reserve currency, has been surging in value. That sounds like a good problem to have, but it can also lead to issues. In other countries, particularly emerging economies, a strong dollar can lead to inflation, for example.

Resilience in the US

Looking at the U.S. Dollar Index (DXY), which measures the so-called greenback against a handful of its main rivals, such as the euro and the British pound, the dollar had a roaring start to the year. And after a brief downturn in March, it’s marching higher yet again.

The dollar is strong in part because the U.S. economy is so strong, having remained surprisingly resilient in the face of high inflation and restrictive monetary policy. Persistent consumer spending has contributed to ongoing growth, while advancements in technology like AI helped to drive corporate profits, spur new investments, and send stocks on an impressive rally over the past six months.

All this growth has also incentivized the Federal Reserve to delay its highly anticipated interest rate cuts. And in the currency world, that’s a good thing. When the central bank raises rates — or in the case of the Fed suggests it will keep it higher for longer — it typically boost the local currency. That’s because foreign investors may want to take advantage of the elevated interest rates, buying dollars to do so. And depending on how long U.S. rates stay relatively higher, this dynamic may continue.

Ripple Effects

The stronger dollar means its currency rivals have weakened in comparison. For nations that have seen their exchange rates fall a lot, this poses a range of issues, from trade, to budgets, to inflation, as exports from the U.S. are getting pricier.

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