The US Dollar reached its strongest point in two decades when compared to other major currencies.
That means buying US dollars will be much more expensive, and the US dollar can buy other currencies in greater quantities, such as pounds sterling, euros, or yen.
This will certainly affect business and household affairs around the world.
How strong is the US dollar?
The dollar index (DXY) –which measures the U.S. dollar against an average of six other major currencies including the euro, pound sterling and yen– has risen 15% in 2022.
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Graph showing the value of the dollar against other leading currencies over the past 20 years.
By that measure, the U.S. dollar is now at its highest level in 20 years.
Why is the US dollar so strong?
The U.S. central Bank has raised interest rates several times this year to cope with rising prices. As a result, the cost of borrowing money becomes more expensive.
On the other hand, you will earn more money if you want to cash out financial investment products such as US government bonds-which are certainly attractive to investors.
Bonds are medium-term and long-term debt securities that can be traded.
Bonds contain a promise from the party that issued the Securities to pay interest (coupon) in return for a certain period and pay off the principal at the end of a predetermined time, to the buyer of the bond. These financial investments are generally considered very safe.
In July 2022 alone, foreign investors bought US government bonds worth US$10.2 billion (Rp154 trillion), and now it has risen to US$7.5 trillion (Rp113 quadrillion).
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Man hurrying across trading floor of New York Stock Exchange Source Image,Getty Images
Image caption, There is a push to buy US government bonds on Wall Street.
Investors have to buy US dollars to get these bonds, and that demand also increases the value of the US dollar.
When an investor decides to sell another currency to buy dollars, the value of that other currency goes down.
Meanwhile, the pound sterling plunged to its lowest level after the British government announced a major tax cut.
Investors also tend to buy the US dollar when the global economy is depressed, because the size of the US economy and region make the dollar a “safe haven” or a safe asset. It also helped raise the value of the US dollar.
Many economies in Europe and Asia are struggling due to the drop in gas prices caused by the conflict in Ukraine.
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The U.S. has not been hit hard by rising energy prices. Although the economy has shrunk in the past six months, U.S. businesses continue to hire – a sign of investor confidence in the local economy.
However, a strong dollar is detrimental to US companies that make money from various regions of the world, such as Apple and Starbucks.
It is estimated that American companies trading on the S&P 500 stock market index could lose US$100 billion in international sales.
What effect does a strong dollar have on countries with weak currencies?
Countries with weaker currencies can benefit from a strong dollar, as they provide services and sell goods to the U.S. at cheaper prices. It’s the same thing as hoisting exports.
However, it also means that goods imported from America are more expensive.
Bar chart showing how the currencies of nine developing nations have strengthened or weakened against the dollar
Since the price of oil is traded in US dollars, the price of fuel oil is currently more expensive in many countries around the world.
In Kenya, for example, the shilling currency fell to a record low against the US dollar. Fuel prices have risen almost 40% since the beginning of 2022.
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Female pump attendant fills a car at a petrol station in Kenyasource Image copyright Getty Images
A stronger dollar is making fuel more expensive in countries like Kenya.
Governments and companies in many countries also often borrow money in U.S. dollars rather than their own currencies because they are more stable.
Because when the value of the US dollar increases, it will be more expensive to pay the debt if you use the local currency.
The Argentine government has been hit hard by the strong dollar.
The country also temporarily banned imports of goods, including cruise ships and whiskey to protect foreign reserves.
What about migrant workers who send US dollars?
Every year people working abroad send about US$625 billion (Rp 9.4 quadrillion) to their home countries. These remittances are vital to the local economy.
Foreign workers in the U.S. alone are estimated to send about$150 billion a year: more than$30 billion to Mexico,$16 billion to China,$11 billion to India and the Philippines.
The stronger the US dollar, the more other currencies can be bought. This makes the recipient of US dollar remittances better.
Fred and Bernadette Cruz with their three sonssource image,Bernadette Roque Cruz
Image caption,Filipino citizen Fred Cruz sent dollars from the US to his wife and children.
Bernadette Cruz lives with her three sons in San Jose City in the Philippines.
The family relies on dollars sent by her husband, Fred, from New York – where she has worked as a nurse for the past 18 years.
The dollar rose 13.5 percent against the Philippine peso. “All commodities are rising in price in the Philippines, including food and services,” Bernadette said.
“But the dollar, which is high, really helps me buy the things we need. The money made the sacrifice of my husband who was abroad even more valuable.”
What do countries do with a strong dollar?
Many countries of the world are trying to increase the value of their own currency by raising interest rates.
In Argentina, the central bank’s benchmark interest rate is currently 69.5%. In Ghana 19%, Nigeria 14%, and in Brazil 13.75%.
But higher interest rates make it more expensive for businesses and households to borrow money.
Companies can have difficulty growing and are very likely to fire their workers. Meanwhile, households are forced to reduce spending.
In turn, such conditions can cause the economy to slip into recession.