The USD - measuring the USD against the euro, Yen and other major currencies - has risen more than 14% this year and has not stopped after more than a year of decline. According to AP, the USD is approaching its highest level in more than two decades against other strong currencies.
What is a strong USD?
Basically, 1 USD can buy many other currencies than before.
Take the example of the Japanese Yen. A year ago, 1 USD was exchanged for about 110 Yen. On September 30, the exchange rate of 1 USD was exchanged for 144 yen, up 30% and one of the largest increases of the USD against another currency.
Rate changes continuously as banks, businesses and traders buy and sell them according to time zones around the world.
The USD index has gained more than 14% this year. The returns earned are even more impressive than other investments, most of which have gone through a gloomy year. US stocks fell more than 19%, Bitcoin fell more than half and gold lost more than 7%.
Why is the USD getting stronger?
Because the US economy is functioning better than other countries.
Despite high inflation, the US job market remains solid. Other sectors of the economy, such as the service sector, have also recovered.
Traders expect the Federal Reserve to keep its promise to continue raising interest rates strongly and maintain it there for a while, in the hope of being able to cut the worst inflation rate in 40 years.
Such expectations have helped the yield on the 10-year Treasury note double to 3.44% from 1.33% a year ago.
Who cares about bond yields?
Investors want to earn extra income from their money. And reviews of US bond yields are attracting investors from all over the world.
Other central banks have shown less determination than the Fed because their economies seem more fragile. The European Central Bank has just raised its key interest rate by 0.75% - the largest increase ever. However, the Fed has raised the benchmark rate twice this year, and is expected to increase it a third time next week. Some traders even said that there could be a huge increase of up to 1%, after the US's hotter-than-expected report on inflation.
10-year bonds across Europe and other regions of the world have much lower yields than US bonds: 1.75% in Germany and 0.25% in Japan. When investors from Asia and Europe buy US bonds, they have to exchange their currency for USD. That pushed the value of the US dollar up.
Will a strong USD help US tourists?
That's right. American tourists in Tokyo spend 10,000 yen on dinner, just needing to spend 23% less than a year ago on a meal at the same price.
The US dollar has risen strongly this year against all other currencies, from Argentina's peso to the Egyptian bang to South Korea's won.
Can a strong USD only help the rich travel abroad?
No. A stronger US dollar also helps US buyers because import prices have decreased and Thus pushed inflation down.
Imports in the US fell 1% in August compared to a month earlier, after a 1.5% decline in July, helping to ease tensions amid high inflation.
A stronger US dollar could help control overall commodity prices. That is because oil prices, gold prices and other commodities are bought and sold in USD around the world. As the US dollar rises against the Yen, a Japanese buyer could get less oil for the same Yen as before. That could help reduce the pressure on oil prices.
Will the US benefit from the increase in the USD?
No. US companies selling abroad are crying because of falling profits. At McDonald's, revenue has fallen 3% over the summer compared to a year ago. But if the value of the US dollar remains unchanged against other currencies, the companys revenue will be 3%. Meanwhile, Microsoft said exchange rate changes have caused its revenue to decrease by 595 million USD in the most recent quarter.
A series of other companies have issued similar warnings recently and further appreciation of the USD could put more pressure on profits. According to Fact Set, companies in the S&P 500 receive about 40% of their revenue from outside the US.
What other damages?
A strong US dollar could lead to financial tightening across developing countries. Many companies and governments in emerging markets borrow in USD and have to repay in USD while the currency increases in value, which is not easy.
Will the USD continue to increase?
The biggest moves in the US dollar may not have happened yet, but many experts expect the greenback to at least hold this high for a while.
The recent US inflation report shocked the market, causing traders to predict the Fed will raise interest rates next year. Fed officials have recently repeatedly reaffirmed their commitment to keeping high interest rates until the end of the job to reduce inflation, even if it harms economic growth.
The Fed's interest rate hike trend will continue to support the value of the USD.
