When I visited my homeland, India, during the summer of 2016, a U.S. dollar could buy about sixty-seven rupees. During my most recent trip in July, the dollar was equal to seventy-nine rupees! Now, that is quite a change!
Over the last few years, several major currencies such as the Japanese Yen, Euro, and Indian Rupee have declined against the dollar. In this article, we will explore the causes of this rise in the dollar and some of its benefits.
First, let’s look at what it means to say that the “dollar is stronger”. Essentially, this refers to one dollar being able to buy more of another currency than it could previously. While many factors contribute to the dollar going up, the main reason is the demand from foreign citizens, financial institutions, and other parties.. Other factors include inflation rates, trade deficits, and political stability.
When compared to other economies, the U.S. economy has been faring pretty well recently. Even though inflation is high, the U.S. job market has stayed strong; some other areas of the economy, including the services sector, have become irrepressible. This benefits the housing industry and other parts of the economy that perform best when interest rates are low. In turn, this has led to traders hoping for the Federal Reserve to hike interest rates for some time, which could bring down inflation as a result. These expectations have caused the yield from a 10-year Treasury, a bond issued by the US government that pays back the initial value plus interest in 10 years, to go up to 3.44% from about 1.33% a year ago. This means that buying the bond from the government guarantees much more money for the buyer today than it did one year ago. Such lucrative yields have been drawing investors from other parts of the world, and in order to buy Treasuries, investors from these other countries trade their own currencies for the U.S. dollar. This pushes up the dollar’s value.
Now, let’s look at some benefits of a strong dollar in 2022. It has helped U.S. tourists spend less when they visit other countries, a welcome change during the post-Covid travel boom. Boarding, lodging, and sight-seeing cost U.S. travelers in international destinations about 23% less compared to pre-Covid times a year ago. Other benefits of a strong dollar include maintaining a cap on import prices and prices of commodities like oil, gold, and others which are bought and sold in U.S. dollars around the world.
Trade experts expect the dollar to stay this high for the foreseeable future. Stay tuned for my next article to find out more about this!
