If you closely examine asset classes in 2022, you will find that, with the exception of the US dollar, most of them witnessed miserable returns this year. The US dollar has gained power over the course of this year after the hike in interest rates by the Federal Reserve to quash soaring inflation. The US dollar index that measures it against a basket of other world currencies displayed it has increased by almost 17% to date this year.
Kavan Choksi- Why is the US dollar gaining strength?
Kavan Choksi is a solid name to reckon with in the world of financial management, wealth building, business management, and investments. He is an expert in the field of finance and economics and has the zeal to help others make the most out of their money.
According to him, there has been a tremendous rise in the US dollar, and this trend is more pronounced when you compare it to the poor performance of real estate, bonds, stocks, and cryptocurrencies, before taking into consideration the influence left by inflation in the world. A substantial dollar value greatly benefits consumers in America, especially when they are buying foreign goods.
The meaning of a strong USD
A strong USD refers to the value of the dollar when compared to another global currency or a basket of other currencies from different countries. A currency is never weak or strong by itself; its strength is displayed only when it is compared to other currencies.
The US dollar is growing more robust because the Federal Reserve Bank has embraced a monetary policy that is watching over the soaring inflation like a hawk. It increased the rate of federal funds from nearly zero at the beginning of the year to a range between 3.0 to 3.25% at the FOMC meeting in September. Observers of the market expect another increase by at least a percentage point by the close of 2022.
The economy in the USA is better than other advanced economies
However, a strong USD does not revolve around the Federal Reserve alone. The economy in the USA might be battling with recession; however, if you compare it with the advanced economies of other nations like the UK, Japan, and European countries, it is much better.
The economies in Europe are bearing the repercussions of the Ukraine-Russia war, especially when it comes to the dramatically increasing costs of energy. Japan is battling with a reduced global demand for its manufactured goods, which constitute most of its exports.
Business expert Kavan Choksi observes that the US dollar is gaining in strength because of the geopolitical issues that are controlling the world economy. It is one of the safest bets for people in China who are investing in it after the nation’s zero Covid regulations and booming real estate bubble.
When investors across the globe invest in US dollars, they sell off local currencies. This trend increases the value of the dollar, and the sell-off of local currencies reduces their weight in the global market.