At the moment, compared to the dollar, the other world currencies are not performing well. This year, the value of all major world currencies has decreased relative to the US dollar. The global economy is influencing this scenario significantly.
The New York Times reported that, Based on a Bloomberg survey, 150 different country currencies have lost value this year compared to US Dollar. The U.S Central Bank Started hiking interest rates to combat inflation after the Russia – Ukraine Was brock out, Which caused the dollars to Appreciate.
Interest rate cuts by the Fed were anticipated to occur early this year. But, since inflation is beginning to rise once more, the Fed is not lowering policy rates at this time. That is exactly the reason for the dollar’s recent strengthening. Interest rates on investments in different US assets are still high because policy rates are rising. For this reason, investors from all over the world are returning to US financial assets; these investments, of course, have to be made in US dollars. The demand for dollars rises as a result, and the exchange rate rises.
According to the news, so much money has flowed into the United States recently that the country’s policymakers, politicians, and even the European Union and Beijing policymakers are on edge.
The US dollar index is the simplest way to evaluate the strength of the US currency. The purpose of the index is to compare the value of the US dollar to six other major world currencies. This index has now increased in value to a level not seen since the early 2000s. Consequently, the Japanese yen’s value has dropped to its lowest point in 34 years. The Canadian dollar and the euro are losing value. Despite its best efforts, China’s central bank is powerless to fight the yuan’s weakness.
According to economist Jesse Rogers of Moody’s Analytics, the Fed is currently the global central bank in this reality.
The rise in the dollar’s value has a significant impact on the economy. Dollars are used in about 90% of all international transactions worldwide. As a result, the value of the dollar rises, leading to global inflation. As the cost of importing goods from the United States rises, the cost of importing products like oil increases. Repayment of debt in US dollars becomes more expensive for the borrowing nations. But countries that export to the United States benefit. In addition to the higher value of the dollar, the purchasing power of US citizens increases.
America’s unexpectedly high growth rate earlier this year shows inflation is not the primary issue. The global economy grows in combination with the US economy. However, if US growth slows and inflation and policy rates rise in the interim, the situation could become dire.
Other nations’ policy makers will become confused in this situation. On the one hand, they might believe that decreasing policy interest rates is important for maintaining the strength of the domestic economy. However, doing so will make inflation rise. Alternatively, they must maintain higher policy interest rates to stop the depreciation of their own currencies.
Asian economies hit hard as the US dollar rises. Japan and South Korea, in particular, have voiced concerns regarding their currencies’ depreciation. In relation to the dollar, the currencies of both nations are currently at multi-year lows.
In this situation, the finance ministers of Japan, South Korea, and the United States recently met in Washington. They committed to keep a close eye on the movements of currencies in foreign markets there.
Their activity can be understood at what stage the situation is. The won, the currency of Korea, is currently at its lowest point since 2022. Regarding the movement in the currency market, the nation’s central bank declared, “This depreciation is too much.”
The yen, the currency of Japan, is also not in good shape. Though it was only for just a moment, the yen crossed 160 against the dollar on Monday for the first time since 1990. After many years, the central bank of Japan recently increased policy interest rates. Japan’s officials worry that if the currency’s problems persist for too long, investors will lose faith in their country.
The European Central Bank is thinking about cutting interest rates for policy. However, they fear that the euro may decline even more if their policy interest rate differential with the US widens. However, Indonesia, a different Asian nation, is increasing policy interest rates in an effort to keep its currency strong. It is clear from observing their behavior what the impact of the dollar’s increase in value is.
The global policy community is finding this situation increasingly difficult to handle. A lot of people worry that the economy will collapse.
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