War and Inflation Powers US Dollar Strength

The surging US dollar and global inflation worries has prompted talk of a new “reverse currency war” as many central banks abandon their longstanding preference for weaker exchange rates.

The US dollar index hit its highest level in nearly 20 years last week after the Federal Reserve’s sharp rate increase.

The euro has fallen to $US1.05 as it’s hit its lowest point in five years and has fallen 7 per cent so far this year. Speculation suggests that the currency could fall even further and reach parity with the dollar, as the fallout from Ukraine damages the Eurozone’s economy.

Despite the Bank of england’s (BoE) continuous rate hikes, the British pound fell to a 2-year low last week. This is mainly due to their announcement of an impending recession later this year.

For as long as we can remember, Switzerland’s central bank (SNB) had a strict policy of not letting the Swiss franc appreciate too much. However, it seems things might be changing with the CHF/USD hitting 3 year lows.

The Bank of Japan has largely avoided aligning its monetary policy with the economic sentiment. Even as the yen falls, policymakers maintain a historically loose stance to make up for shrinking government bonds and increased inflation.

Still, even as the currency continues to drop rapidly, there is speculation that Japan’s finance ministry might intervene. It’s not been done since 1998 but many are taking this possibility seriously.

It’s been noted that emerging markets with a lot of debt will face problems due to the strong dollar.

An example of this is the Indian Rupee which has hit a record low around 77 a dollar as the Dollar becomes stronger and foreigners continue to sell Indian stocks.

When the oil price goes up, the rupee will continue to be under pressure. India imports a lot of oil and relies on imports for about 80% of their total needs. High energy prices will mean the price of everything rises, and the trade deficit gets worse.

Disclaimer: Please note any provider recommendations, currency forecasts or any opinions of our authors or users should not be taken as a reference to buy or sell any financial product.