The world‘s major currencies have all fallen against the US dollar this year, with two-thirds of the 150 currencies analyzed by Bloomberg weakening against the greenback. This significant swing could have serious consequences for the global economy.
The strength of the US dollar is due to a change in expectations about when and how much the Federal Reserve may cut its benchmark interest rate, which is at its highest level in 20 years. The high rates set by the Federal Reserve, in response to stubborn inflation, have made US assets more attractive to investors, causing money to flow into the United States.
The dollar index, which measures the strength of the US currency against a basket of its major trading partners, is currently at levels last seen in the early 2000s. This has led to the yen hitting a 34-year low against the US dollar, while the euro, Canadian dollar, and Chinese yuan have shown signs of weakness.
The strengthening dollar has far-reaching effects, intensifying inflation abroad and increasing interest bills for countries that have borrowed in dollars. It also benefits US exporters selling to America but puts US companies selling abroad at a disadvantage.
The effects of the strong dollar are being felt especially intensely in Asia, with finance ministers from Japan, South Korea, and the US expressing concern over recent currency depreciation. Similarly, Europe and other regions are also grappling with the impact of the strong dollar on their economies.
Policymakers are facing a dilemma on how to manage the effects of the strong dollar on their national economies and currencies. With different countries considering lowering or raising interest rates in response to the strong dollar, the global economy is on the brink of a storm.