According to the Wall Street Journal, the US has again emerged as the winner in the ongoing global currency war. And, just as America won the war against the forces that wanted… the dollar to depreciate after the 2008 financial crisis, this time the US was determined not to let the dollar appreciate.
In any case, the Federal Reserve (Fed) still maintains its position as the most powerful and powerful central bank in the world. Whether the price goes up or down, the dollar remains a sharp weapon.
The question investors are now asking is whether the appreciation of the dollar will help rebalance the global economy or whether the global economy will wobble. Now it takes just 1 cent more to balance the dollar against the euro for the first time since 2002, and the dollar is also at its highest level since 1998 against the Japanese yen. After adjusting for inflation, the dollar has only been stronger twice in history. That was in 2002 and 1985.
Dollar Index.Source: Wall Street Journal
There are two reasons for the strong appreciation of the US dollar in recent times: monetary policy and the strength of the US economy.
Despite the recent release of disappointing US economic data, after a period of strong growth, the world’s largest economy still stands out compared to the rest of the world. The strong appreciation of the dollar against the euro and the yen was partly due to high gas prices and the risk that Russia would cut off gas supplies to Europe. As major importers of energy and machinery, Japan and Germany will be hit hard.
Unsurprisingly, new investment flows will change direction, and the US is an attractive destination because shale oil allows it to be self-sufficient in energy. This makes the USD appreciate even more.
“America has a lot of competitive advantages,” said Jonas Goltermann, an economist at Capital Economics.
In contrast, import costs for Japan and Germany have risen sharply, mainly because they have to spend more money to import energy. In May, Germany recorded a trade deficit for the first time since 1991, while the country is still known for maintaining a trade surplus.
In a way, the dollar is helping to improve the situation. If the market is right, Germany will face high energy prices forever and will have to adapt to reduce its dependence on heavy industry and chemical plants that run on cheap gas. imported from Russia. A weak euro helps to increase the competitiveness of the economy while encouraging investment capital to flow to export industries that consume less energy.
But a weak local currency hurts consumers, who can no longer buy imported goods, and increases inflation. In the US, the opposite is happening: a stronger dollar makes it difficult for exporters and reduces the profits of multinational companies, but will make imported goods cheaper and help fight inflation.
The impact of monetary policy on the USD is very clear. Money in the US will yield higher returns elsewhere, so the USD’s incentive to appreciate is growing. The Fed is raising interest rates to curb inflation, but the European Central Bank has not (although it has announced it will) and the Bank of Japan is determined not to raise interest rates. Expectations for a further rate hike by the Fed have eased in recent weeks as recession fears have mounted, but expectations for rate hikes in Europe have shrunk even more.
It is difficult to say exactly when the USD rally will stop. The purchasing power parity method compares the price of an item in many countries, but often produces results that differ far from the actual exchange rate. According to the Big Mac index compiled by The Economist for years, a Big Mac sandwich in Japan is now 42% cheaper than in the US at current exchange rates.
The Japanese yen has fallen sharply recently.
Without effective metrics, currency traders often rely on technical charts to predict volatility trends. They consider the parity of the euro with the US dollar to be a reasonable thing in the context of the conflict in Ukraine which has not ended as it does today. However, the Japanese yen is too cheap and will adjust in the near future. An anomaly of the yen is that it is often seen as a haven and will rise in times of uncertainty, but in recent weeks, as fears of a global economic slowdown have mounted, the currency has fallen.
The more the exchange rate is stretched, the faster and more painful the adjustment period will be. However, if nothing unexpected happens, such as a peace deal in Ukraine that brings cheap gas back to Germany or the Fed changes course to ease monetary policy, it’s hard to find out. see the reason for the USD to change direction and depreciate.
Consult the Wall Street Journal
