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The soaring dollar could help the Fed stop inflation

By: Thomas Yan

Several U.S. trading partners have been straining their economies due to interest rate hikes by the Federal Reserve, providing Americans with bargains in Europe and Asia while also putting imported goods on sale at home. Euro and yen, as well as several other major currencies, have reached multi-decade highs in the dollar this week, and the dollar is almost certain to climb even higher. The Fed has signaled additional rate increases will start on July 27, following a 9.1 percent rise in consumer prices over the past year. The robust greenback is evidence that the Fed's anti-inflation campaign is starting to work, even as prices continue tverall. Currency weakness overseas, on the other hand - the flip side of the dollar's strength - complicates the fight against inflation. Currency prices are trading in a wider arc as years of low inflation and low-interest rates have given way to the current era of greater volatility.

As a result of the war in Ukraine, which has upended global food and fuel markets, Europe and many developing countries have taken more punishment than the United States, which explains the strength of the dollar. Over the years, dollars, euros, yens, and yuan have moved relatively narrowly. Peterson Institute for International Economics President Adam Posen said, "This is the first time in decades that everyone's down against the dollar.". Countries like India, South Korea, and Thailand that import oil priced in dollars, such as the more muscular dollar, are straining their budgets. A rising dollar is also hurting developing countries like Ecuador and Tunisia, which need financial aid to pay their debts. Despite the country's rapid recovery from the pandemic, the dollar has outperformed the DXY Index by 13 percent this year.

And it shows that Federal Reserve officials, after misreading price signals for most of last year, have belatedly adjusted more quickly than their counterparts in Frankfurt and Tokyo. At its next meeting later this month, the Fed is expected to increase rates at least three-quarters of a point, bringing the total to 75 basis points this year. A quarter-percentage point is all that's expected from the European Central Bank at its July 21 meeting, the first in 11 years. Even though the June inflation rate reached 8.6 percent, the key European rate is expected to remain in negative territory until September. Despite long-term low inflation in Japan, the Bank of Japan decided last month to keep its main interest rate at a negative 0.1%.

Despite the surge in inflation, central banks are reacting differently, according to Marc Chandler, managing director of Bannockburn Global Forex. As for the stronger dollar, it's not all good news for the United States. "The U.S. is tightening its monetary policy the most aggressively since 1980. Since the dollar is losing value against foreign currencies, American products are becoming more expensive for overseas customers. It hurts major exporters such as Boeing, the world's largest manufacturer of commercial aircraft. Additionally, when overseas earnings are converted into dollars, giant U.S. corporations are seeing their stock values plummet. The strong dollar reduced Microsoft's projected earnings by around $250 million last month, according to its forecast. Due to this, US multinationals may reduce spending in other areas as a result of the rise in the dollar, which will contribute to the economic slowdown.

Source: https://www.washingtonpost.com/business/2022/07/17/dollar-inflation-global-economy/

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