According to the Wall Street Journal, in the ongoing currency war in the world, the US has once again become the winner. And, just like how America won the war against the forces that wanted the dollar to depreciate after the 2008 financial crisis, this time the US was determined not to let the dollar appreciate.
In any case, the Federal Reserve (Fed) still asserts its position as the most powerful and most powerful central bank in the world. Whether the price goes up or down, the dollar is still a sharp weapon.
Now, the question investors are asking is whether the appreciation of the dollar will help the global economy rebalance or will it cause the world economy to wobble. Now just 1 cent more is needed for the greenback to parity with the euro for the first time since 2002, and the dollar is also at its highest level since 1998 against the Japanese yen. After adjusting for inflation, only twice in history have the dollar been so strong. That was in 2002 and 1985.
Dollar Index.Source: Wall Street Journal
There are two reasons for the strong appreciation of the US dollar in recent times: monetary policy and the strength of the US economy.
Despite the recent release of disappointing economic data from the US after a period of outstanding growth, compared to the rest of the world, the world’s largest economy still stands out. The dollar’s strong rise against the euro and yen was partly due to high gas prices and the risk of Russia cutting off gas supplies to Europe. As major importers of energy and machinery, Japan and Germany will be severely affected.
It is not surprising that new investment flows will change direction, and the US is an attractive destination because it can be energy self-sufficient thanks to shale oil. This makes the USD appreciate even more.
“America has a lot of competitive advantages,” said Jonas Goltermann, an economist at Capital Economics.
In contrast, the cost of imports for Japan and Germany has increased sharply, mainly because they have to spend more money to import energy. In May, Germany recorded a trade deficit for the first time since 1991, while the country is still famous for maintaining a trade balance surplus.
In a way, the dollar helps improve the situation. If the market is right, Germany will forever face high energy prices, and the country will have to adjust to reduce its dependence on heavy industry and chemical plants that run on cheap gas. imported from Russia. A weak euro helps to increase the competitiveness of the economy, while encouraging investment capital to flow to export industries that consume less energy.
But a weak local currency hurts consumers, who can no longer buy imported goods, and increases inflation. In the US, the opposite is happening: a stronger dollar makes it difficult for exporters and reduces the profits of multinational corporations, but will make imported goods cheaper and help fight inflation.
The impact of monetary policy on the USD is very clear. Money in the US will bring higher yields elsewhere, so the incentive for the USD to appreciate is growing. The Fed is raising interest rates to curb inflation, but the European Central Bank has not (although it has announced it will) and the Bank of Japan is determined not to raise interest rates. Expectations for a further rate hike by the Fed have waned in recent weeks as recession fears have grown, but expectations for rate hikes in Europe have shrunk even more.
It is difficult to say exactly when the USD rally will stop. The purchasing power parity method compares the price of an item in many countries, but often produces results that are far from the actual exchange rate. According to the Big Mac index that the Economist has compiled for many years, at the current exchange rate, a Big Mac sandwich in Japan is now 42% cheaper than in the US.
The Japanese yen has fallen sharply in recent times.
With no effective metric, currency traders often rely on technical charts to predict volatility trends. They consider the euro parity with the US dollar is a reasonable thing in the context of the conflict in Ukraine has not ended as today. However, Japanese yen is too cheap and will adjust in the near future. One anomaly of the yen is that it is often seen as a haven and will appreciate in times of uncertainty, but in recent weeks, as fears of a global economic slowdown have increased, the currency has fallen.
The more the exchange rate is stretched, the faster and more painful the adjustment period will be. However, if nothing unexpected happens – like a peace deal in Ukraine that brings cheap gas back to Germany or the Fed changes course to easing monetary policy, it is difficult to find out. see the reason for the USD to change direction and depreciate.
Consult the Wall Street Journal
Source: Vietnam Insider