Is The Dollar Your Mate?

The UK’s official currency, Pound Sterling, recently hit an all-time low against the dollar. Financial markets currently see a 60% chance of the US Dollar reaching parity with the British Pound, i.e., $1=£1. At the time of writing, the exchange rate is $1=£0.94; just a year ago, it was $1=£0.73.

A few months back, the Euro was at parity with the dollar, that is, $1=€1. Some people have bought dollars at over ₦720 recently. Japan’s government had to intervene to buy more Yen to prop up the Yen exchange rate to the dollar. Even cryptocurrency prices have seen some weakness due to the strengthening dollar.

The dollar is clearly not anyone’s mate. For over a year, the US Dollar has been strengthening relative to other major global currencies. Why is the dollar so strong right now, and how can you benefit from the dollar’s strength?

Why is the dollar so strong right now?

The US Federal Reserve has been aggressively raising interest rates to quench burning inflation. Higher interest rates relative to other developed markets make US bonds more attractive. This makes investors convert their local currencies to dollars to invest, which strengthens the dollar.

Also, the US Dollar is the world’s reserve currency. When there’s an economic crisis, global investors tend to run to the USD as the safe haven currency of choice. The world is currently in a crisis of soaring inflation and a possible global recession.

Why are other currencies weak?

There are unique reasons for each currency’s weakness.

The Pound has been weakening relative to the dollar over the last year due to rising UK inflation and recession fears. Before the most recent plunge started, the pound was already down over 20% relative to the US Dollar in the last year. The recent slump was due to the massive tax cuts the new British Prime Minister, Liz Truss, and Chancellor, Kwasi Kwarteng, announced. Investors fear these tax cuts will fuel already soaring inflation because it will give all citizens more money to spend.

Relative to the dollar, the Euro is weak due to the Russia-Ukraine war, which caused an energy crisis in the Eurozone. As gas and oil prices soared, high inflation came. And because Europe had negative interest rates and started raising rates later than the US, it weakened the Euro.

The Yen’s weakness resulted from US interest rates being higher than the Japanese. Unlike most countries today, Japan doesn’t have a high inflation problem. Japanese inflation currently sits at 3%, and the Japanese central bank is looking to stimulate inflation, not curb it, like the rest of the world. Compared to US bonds, the lower interest rates Japanese bonds offered made investors sell their Yen and demand more dollars.

How can you benefit from this?

You can benefit from the strength of the US dollar by saving and investing in dollar-denominated assets like the ones offered by Risevest. In light of recent developments, your Japa funds, travel funds and other international spending budgets may be better kept in dollars.

Other currencies should eventually regain their strength when their Central Banks raise interest rates to match the US, control inflation and avoid a recession. Till then, the US dollar continues to reign supreme. 

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