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The dollar is strong in the face of inflation

The dollar is strong in the face of inflation

Inflation alarmism is pervasive in the media, and with a new inflation readout coming today, we can expect headlines galore about the topic.

However, in spite of concerns about inflation, the U.S. dollar is actually the strongest against world currencies than it has been in over two decades. The U.S. Dollar Index, which measures the value of the dollar against six other leading currencies, rose to highs not seen since Sept. 2002.

  • Why is that so? The world economy is still reeling from the impacts of the COVID-19 pandemic. Nearly every global currency is experiencing inflation or other economic headaches. However, the Dollar has remained relatively strong in the face of adversity.

The factors

Inflation

Almost every leading economy used economic stimulus to bail companies, families, and local governments out of Pandemic Shock. However, the perfect storm of supply constraints in the energy market, supply chain headaches, and excess cash in the economy has caused residual inflation.

In May, the USA’s inflation figure notched +8.6% YoY. This figure is comparatively higher than other developed economies, such as Japan (+2.5%), France (+5.8%), and Canada (+7.7%). However, the U.S. economy towers above many other nations and has seen robust growth in spite of the pandemic.  

Related: Why is inflation doing us dirty? 

Rising rates help out

The Fed is acting more aggressively than other nations’ central banks to curb inflation.  U.S. interest rates are expected to land around 3.4% by the end of the year, nearly assuring lower inflation and higher returns for Dollar HODLers. This might help to increase demand for the Dollar.

A geopolitical shield

 The U.S. is uniquely situated to avoid the fallout from Russia’s invasion of Ukraine, and the subsequent decision of Western economies to reduce the amount of energy they buy from the country. Geopolitical tension and energy shortages in the European Union have weakened the Euro, but the U.S.’s energy independence and distance from the conflict in Europe is paying in spades. 

The impacts

Good and bad: A stronger dollar is good for Dollar HODLers. If you’re sitting on Dollars, you could expect higher interest rates in your savings accounts and greater buying power from other countries. However, investors might need to be concerned:  businesses doing business in other world currencies might see reduced profits when trying to convert back to USD. 

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