The Dollar's Strength or Other Currencies' Weakness?

The Dollar's Strength or Other Currencies' Weakness?

2022-06-27 • Updated

The value of the US dollar continues to rise, but is this because of the strength of the dollar itself or just the weakness of the euro, Japanese yen, and British pound?

Since the beginning of the year, the US dollar index has been up 8.8%, with the Federal Reserve continuing to fight inflation after raising rates three times so far. And so, one by one, major central banks began their battle to tame inflation and keep pace with the Fed's reckless tightening. From here, the dollar soaked its strength, but is it a real strength, or is it due to the weakness of other currencies?

Why is the Japanese yen weak?

The Japanese yen has always been a safe haven for risk-averse investors and traders. But for now, it's not, as the Bank of Japan persists in keeping rates close to 0% while sticking to ultra-easing policies and massive bond purchases. While most of the world is fighting inflation, Japan has struggled with deflation for decades.

However, after the wave of rising prices globally, inflation in Japan finally jumped above the 2% target. Therefore, it's unsurprising to see the yen weakening against the US dollar. So far, the yen has fallen more than 17% after the dollar broke through 136.50 levels for the first time in 24 years. If the BoJ continues its easing policies, the pressure on the Japanese yen will persist.

Why is the Euro weak?

The European Union suffers from very high inflation that has reached 8.1%, its highest level ever. However, the European Central Bank didn't respond to the pressures. Everyone criticizes the ECB for allowing other central banks to get ahead of it. What's more, the ECB's insisting on not hiking rates or ending its bond-buying program.

The euro will feel the most damage because signs of recession in Europe are showing faster than in the US. All of this pushed the euro down, coming close to parity with the USD, after dropping below 1.05 for the first time since 2016.

However, the euro may get some support after the ECB confirms its intention to raise rates at next month's meeting. The euro has fallen against the dollar by about 7.5% through 2022.

Why is the pound sterling weak?

The British pound is suffering from the failure of the Bank of England to control inflation. So far, the BoE has raised rates five times in recent months. But all of these hikes didn't manage to cool inflation in the UK, which reached a 40-year high of 9.0%.

With increasing pressures on the British economy and negative data, the pound's decline against the dollar continued to exceed 9% since the beginning of the year.

Why is the US Dollar strong?

The Fed's tightening cycle and relentless rate hikes have supported the dollar. Foreign investors also sell stocks and bonds to store the money they receive in US dollars.

However, the dollar may lose some ground with other central banks rushing to raise rates. Recession fears may also prompt the Fed to halt or slow the aggressive rate hikes to save the already weak US economy. Therefore, the proof of the real strength of the dollar will appear when the rest of the currencies bare their teeth and the US currency remains steady.

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