US Dollar Blazes Higher on Solid Data as Geopolitics Play Out
The dollar soared again Friday as solid data from the United States unveiled an economy that remains strong even if the Federal Reserve hikes rates. The US Dollar Index climbed to its highest level against a basket of six currencies in more than two decades, while Treasury yields also surged on the prospects of further tightening by the Fed.
A Strong Dollar Can Keep Prices in Check for Commodities globally
The U.S. dollar is the world’s dominant currency, and that means it plays a big role in global trade. That’s good news for Americans, but it can hurt people in other countries if they need to use the dollar to pay for things like oil and gold.
It’s also a key factor that drives inflation around the globe. A stronger dollar can offset that because it makes one dollar buy more of another currency than it would otherwise. That can help keep prices in check for commodities generally, as they are usually sold and bought in dollars.
A Strong Dollar Can Put a Financial Squeeze on Low-Income Nations
Many emerging economies are dependent on the dollar to function and that can cause problems for those nations if the currency starts to get too strong. That can make it difficult for these nations to repay debts in their own currency and can lead to trouble, according to Eswar Prasad, an economist at Cornell University.
Similarly, companies that sell overseas can be harmed by fluctuations in foreign-currency values because it can cut into profits. That’s why some large companies, including McDonald’s and Microsoft, have warned that a stronger dollar could mean lower revenue.
A Strong Dollar Can Keep Prices In Check for Commodities globally
The value of the dollar is also important for oil, which is traded and bought in U.S. dollars across the world, and for other commodities, such as gold and copper. When the dollar rises, it can make it easier for a Japanese buyer to buy fewer barrels of crude for the same number of yen that they would have before.
A Strong Dollar Can Put Almost Any Major Country in Difficulty
When the dollar is too strong, it can hurt countries that depend on the dollar for everything from their trade to their government’s budget. That can cause problems for countries like Turkey, which is a large exporter of oil.
It can also cause problems for countries that have a lot of money but not a lot of cash, such as Russia and China. That can cause major economic problems for those nations, and it can lead to a trade war with the U.S.
That’s why it can be useful to understand the dollar’s relative strength versus a basket of foreign currencies. It can help investors and consumers see where the dollar is strongest and weakest.
The dollar’s strength is supported by high interest rates in the United States, a relatively robust economy and safe-haven demand from global turmoil. That’s why it’s expected to continue gaining ground in the months ahead.
