Last updated on October 27, 2023
| The US dollar has always been one of the strongest currencies in the world. Recently, however, the US dollar has been on a hot streak, reaching its highest level in 20 years against a multitude of competitors. The Federal Reserve has raised interest rates by 225 basis points since March 2023 to combat inflation. This has made the US dollar more attractive to investors, as they can earn a higher return on their investments in the US than in other countries with lower interest rates. International investors would be wise to hedge their bets with the US dollar. Unfortunately, the war in Ukraine has led to increased uncertainty and volatility in global financial markets due to the various international political factors that come as a result of any war. Russia, as a world superpower, can influence many trade routes, economies, and ways of life through political, economic, or physical threats. As a result, investors have flocked to the US dollar, which is seen as a safe-haven currency due to the US’s strong military and political presence. In times of economic uncertainty, investors tend to flock to safe-haven assets such as gold and the US dollar. This is because the US dollar is backed by the US economy, which is the largest in the world. Based on a business’s main method of income, the strong US dollar can help or hinder their profits. For businesses that export goods and services, the strong dollar makes their products more expensive for overseas buyers. This can lead to lower sales and profits due to buyers being unwilling to spend their money on a more expensive product. For businesses that import goods and services, the strong dollar makes their inputs cheaper due to an adjusted exchange rate that gives them more “bang for their buck”. This can lead to higher profits. Why should we care? The strong US dollar provides Americans earning in the currency a greater advantage over those earning in other currencies. Exchange rates also dictate things like how expensive vacations are, and the strong dollar will help Americans spend (on average) less money internationally. The US dollar is expected to remain strong in the near term, as the Federal Reserve continues to raise interest rates and the war in Ukraine continues. However, the strength of the dollar will depend on several factors, including the path of inflation in the US and other countries, the outcome of the war in Ukraine, and the global economic outlook. |
Complex Terms
Basis points: A basis point is one hundredth of 1 percentage point.
Exchange rate: The rate at which one currency can be exchanged for another.
Interest rate: The rate at which interest is charged on loans or paid on deposits.
Federal Reserve: The central bank of the United States.
Aggressive interest rate hikes: The Federal Reserve raising interest rates at a faster pace than usual.
Currency hedging: The use of financial instruments to reduce the risk of foreign exchange fluctuations.
Exporting businesses: A strong dollar makes exported goods and services more expensive for foreign buyers. This can lead to lower sales and profits.
Importing businesses: A strong dollar makes imported goods and services cheaper. This can lead to higher profits.
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