Almost every asset class has witnessed disappointing returns in the year 2022, apart from the United States dollar. As the Federal Reserve hiked interest rates in order to quash sky-high inflation. The U.S. dollar dramatically strengthened over the course of the year.
Finance expert Kavan Choksi further pointed out that the U.S. Dollar Index was up more than 17% till the November of 2022. The U.S. Dollar Index is meant to measure the greenback against a basket of other currencies.
Kavan Choksi shares an insight into the strength of USA currency in 2022
A strong dollar is known to refer to the relative value of dollars in comparison to another currency or even a group of currencies. A currency cannot be weak or strong on its own; it can only be so when compared to something else. The United States dollar is strengthening largely because the Fed has adopted a hawkish monetary stance in response to the growing inflation rates. It has lifted up the federal funds rate from near zero in 2022 to a range of 3.75% to 4% in the November meeting of the Federal Open Market Committee (FOMC).
Many market observers even expect another point increase by the end of 2022
The strong USA currency, however, is not only about the Fed. Even though the economy of the United States might be dealing with a recession. It is still looking better than many other advanced economies. These economies include Japan, European nations, and the United Kingdom. A large number of economies are bearing the brunt of Russia’s war on Ukraine, particularly in the form of dramatically high energy expenses. Japan additionally has been struggling with lower global demand for manufactured products, which make up a good portion of its exports.
On the other hand, a large number of geopolitical risks that are swamping the global economy, including the economic troubles in China, have driven investors to safe-haven investments.
Kavan Choksi points out that currently greenback is considered to be among the safest bets around for investors. As global investors pour money into the United States dollars, they would be selling off other currencies. Buying dollars essentially enhances the value of the greenback, while selling the other currencies makes their value weaker.
Consumers in America have clearly been the beneficiaries of the high strength of the dollar. Any kind of imported services or goods purchased in yen, pounds, or euros would be considerably cheaper at the moment, in comparison to a year or two. This comes as a welcome development for consumers who are already struggling due to high prices at home. The strong USA dollar is providing an offset to inflationary pressures that have been witnessed in improving consumer spending.
The strength of the dollar is even more pronounced in comparison to how poor the performance of cryptocurrencies, real estate, bonds, and stocks is. However, it is imperative to note that a strong dollar is not wholly positive, particularly for the investment portfolio and manufacturers. As the dollar is almost the strongest in two decades against the euro. It puts American manufacturers at a pricing disadvantage against many of their foreign competitors.