The US dollar is globally recognized as a safe haven, and so the recent market condition has increased demand for the currency.
The Euro/Dollar is currently 1.014 according to data. This means the US Dollar is closer to equaling the value of the Euro for the first time in 20 years. The US Dollar index is nearly 12% this year which is a two-decade high. This index measures the value of the Dollar against six major foreign currencies. The reason for this surge has been linked to the recent effort by the Federal Reserve to control the growing inflation by hiking interest rates.
The impact on the US treasury has attracted investors who seek to take advantage of the rising yield in the US. This has caused an increase in demand for Dollar-denominated securities, which in return has increased the value of the currency.
The Euro has never been valued less than the Dollar since July 15, 2002. The current pressure on the Euro is linked to the fear that 19 countries that use the currency may go into recession. The current rate of the US dollar is a threat to American companies because their goods may be expensive to foreign buyers. Once the export is affected, the US economy would feel a negative impact. However, a stronger currency may make imported goods less expensive in the country, and inflation will become a less concern.
Analyst at UniCredit has admitted that the foreign exchange market has been affected by the global recession fears. The US dollar is globally recognized as a safe haven, and so the recent market condition has increased demand for the currency. Mark Zandi, chief economist at Moody’s Analytics also calculates that a 10% rise in the US Dollar against the currencies of its trading partners in the past year reduces inflation by 0.4% point. He believes that a stronger currency gives foreign products a price edge in the country.
“The stronger currency, weighs on (economic) growth as it results in reduced exports, more imports, and thus a wider trade deficit,” said Zandi.
Eswar Prasad, an economist at Cornell University has also stated that the price of the US Dollar will not do any favor for US exporters. As it stands, the currency is complicating the problems of the already struggling US economy.
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