Compared to the euro, the dollar has surged, even in a volatile economic climate. And it may continue to strengthen despite global worries, according to The Atlantic’s Annie Lowrey.
In 2022, the dollar appreciated about 16% against the euro, 21% against the pound, and 30% against the yen. It has also gained substantially against low-income countries.
Despite the Federal Reserve’s hiking of interest rates, corrections in some local housing markets, and a slowing building pipeline, the U.S. remains strong compared to other countries, Lowrey said, citing a low unemployment rate as partly to blame.
Europe is facing higher rates of inflation, an energy crisis, and the reverberations of Vladimir Putin’s unprovoked invasion of Ukraine. Developing countries are struggling with high commodity prices and fuel shortages. And China’s economy is expected to grow only about 3% in 2022, about one-third its normal rate. The strong dollar makes prices higher for some of these countries, which have to import food and other goods denominated in dollars, Lowrey said.
Also, because of these troubles, other countries are investing in the U.S., boosting the value of the dollar even more, she writes.
“The impact of the Russia-Ukraine war is weighing heavily on Europe’s outlook, while China’s COVID-19-related shutdowns and property market weakness are holding back growth in Asia,” Kathy Jones, the Chief Fixed-Income Strategist at the Schwab Center for Financial Research at Charles Schwab, told The Atlantic. “Even with the recent weak GDP growth, the U.S. still looks better positioned to weather a global economic slowdown.”
Treasuries have become more profitable for investors in the short term, as the Fed has raised interest rates. And assorted factors are tamping down interest on American government debt, though Washington is currently offering higher interest rates than Brussels, London, or Seoul.
Whether the dollar will lose its position as the world’s preeminent reserve currency is as of yet unknown. Foreign governments may lose their appetite for U.S. debt, writes Lowrey. Republicans may force an avoidable confrontation over the debt ceiling. Europe may become more politically stable than the U.S., with freer and fairer elections. Any one of these developments could cause other currencies to appreciate against the dollar.