Why is the US dollar so strong, and what does it mean?

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 U.S. dollar against six other major currencies, including the euro, pound and yen, is set to rise 15% in 2022.
By this measure, the dollar is at a 20-year-high.

The US Federal Reserve has raised interest rates several times this year to control rising prices. This makes borrowing money more expensive.
Bonds are a way for governments to borrow money that is very safe and promises to be paid back with interest in the future.
It also means you get more returns on financial products like US government bonds, making them more attractive to investors.
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.

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 weaker currencies can benefit from a stronger dollar by boosting their exports and providing goods and services more cheaply than the United States. However, it means that the prices of goods imported from the United States will increase.

Because the price of oil is calculated in US dollars, fuel prices are high in many countries of the world.

For example

For example, In Kenya, the shilling has fallen to a record low against the dollar, and fuel prices have increased by nearly 40% since the start of 2022.

As the dollar appreciates, those loans become more expensive than paying them off in local currency. Argentina's government has been hit particularly hard by the dollar's strength.

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.

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