The US dollar is in flux, but all is not well

(CNN Business) – The US dollar is in a continuous line. Driven by the aggressive tightening of Federal Reserve policy, the value of the US currency has soared to multi-decade highs and is crushing currencies around the world.

Emerging market countries usually bear the brunt of a strong dollar. This is because US politicians, investors, and companies have encouraged developing countries to peg their currencies to the dollar. A strong dollar is crushing the poorest countries that must meet their dollar debt obligations and depend on the United States for food imports.

But something strange is happening during this ascent. The dollar rises more against the currencies of rich economies than against the currencies of emerging markets.

Investors looking for a good return on government bonds often turn to high-risk developing countries because they pay high interest rates. When the Federal Reserve raises interest rates, investors realize that they can get those payments without the risk and move their money back to the United States. This boosts the dollar, but lowers emerging market currencies.

But central banks in emerging countries are also tightening monetary policy as developed countries keep interest rates relatively low, so the rules have changed. This, along with fears of a war-induced recession in Europe, has prompted investors to invest in the dollar.

future problem: The euro is at its lowest level against the dollar in 20 years, and the British pound is at its lowest level against the dollar since 1985.

The Federal Reserve’s trade-weighted dollar index, which measures the value of the dollar based on its competitiveness with its trading partners, is up 10% this year against the currencies of other advanced economies, its strongest level since 2002. By comparison, the dollar is only 3.7% higher against Emerging market currencies.

The change adds to a host of challenges already driving up inflation in Europe, as the continent heads into winter with a looming energy crisis. Prices for Japan’s energy imports are also rising, and made worse by the dollar. The big S&P 500 companies, most of which have a strong global presence, aren’t happy about all this either.

The course continues: Fed officials said they will likely keep raising rates until 2023, so there won’t be much easing in the near future. said Quincy Crosby, chief global strategist at LPL Financial.

bad for business: S&P 500 companies with a global presence also have to contend with a strong dollar eroding their revenue growth. Crosby said about 30% of S&P 500 companies’ revenue is generated in markets outside the United States. During earnings season, many companies said that the strength of the dollar actually affected revenue growth. LPL Financial estimates that dollar strength subtracted 2 to 2.5 percentage points from S&P 500 earnings in the second quarter.

conclusion: Crosby said the dollar’s strength should stop accelerating when the Fed stops raising interest rates. But there are external forces that could keep the dollar rising even after the Federal Open Market Committee called it daily: the current weakness in the euro and other currencies is not just due to the Fed. It also reflects investors’ fears of an impending recession in Europe. Therefore, investors are turning to the dollar, at least for the time being. The US currency is expected to remain strong for some time.

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