Will the Dollar’s Surge End in Whiplash?
Some earlier big run-ups in the US currency’s value, including in the mid-1980s and the early 2000s, were eventually followed by sharp declines. But the only thing that can be said with certainty is that the period of extraordinarily quiescent major-currency exchange rates, beginning back in 2014, is now history.
CAMBRIDGE – The US dollar has been on a tear this summer. The Japanese yen and the euro have fallen to their lowest levels against the greenback in two decades; the euro, long worth more than one dollar, is now hovering close to parity. The US Federal Reserve’s broad trade-weighted dollar index has almost re-attained the peak it reached in March 2020 amid the panic triggered by the start of the COVID-19 pandemic. In fact, if one adjusts for inflation in the United States and its trading partners, it is already higher.
This is happening despite the US recording its highest annual inflation rate in four decades and its worst trade balance since the global financial crisis. What is going on, and is the dollar set to plummet?
While acknowledging that exchange rates are extremely difficult to explain, much less predict, four major factors seem to be influencing the movements of the world’s major currencies. Most importantly, the Fed has begun hiking interest rates, and with the US economy seemingly nowhere near a true recession, there is still room for it to tighten policy further.