The Mighty US Dollar Strengthens: What Does It Mean for Americans and the World?

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2024-04-21 19:57:00

(CNN) — The mighty US dollar strengthened last week, in a positive sign for Americans’ purchasing power.

The US dollar index, which measures the currency’s strength against six of its peers, closed at 106.26 on Tuesday, the highest level since early November. The significant strength of the US economy has been one of the main reasons for the dollar’s rally over the past week.

The latest retail spending data released on Tuesday showed that Americans are continuing to open their wallets, while other figures released earlier this month show that the US labor market remains strong and the country’s manufacturing sector expanding.

Federal Reserve officials said the economy’s resilience allows them to keep rates at their highest level in 23 years, pending more evidence that inflation is moving toward its 2% target. The central bank cuts rates if it is clear that the economy is contracting, as it is also responsible for maximizing employment as well as stabilizing prices.

However, there are signs that the cooling of inflation has stopped. March was the third consecutive month in which inflation exceeded forecasts. Headline inflation has accelerated recently with rising gasoline prices and continued rising housing costs.

Federal Reserve Governor Michelle Bowman suggested in a speech on Wednesday that the central bank may have to raise rates again or further delay the first rate cut, because “there is a lot of activity in the financial markets and a lot of continued growth we wouldn’t have to. to be expected if the policy were sufficiently restrictive.”

But the strength of the US economy is not the only thing that has lifted the dollar.

Before the Stone talk to Claudio Irigoyen, head of global economics at Bank of America, about the rise of the dollar and what it means for Americans and the world.

This interview has been edited for clarity.

What is driving the rise of the dollar, other than the resilience of the US economy?

Claudio Irigoyen: The dollar is strengthening for several reasons. It’s not just that the Federal Reserve has said it won’t be lowering rates anytime soon, sending the markets into a tailspin. It is also the case that the US economy is doing better than the rest of the main regional blocs, including the eurozone. Most of the growth surprises continue to come from the United States.

It is also because every time there is a geopolitical shock, there is a flight towards quality components, which helps the dollar. And if events continue in the Middle East, those shocks will cause a spike in energy prices, and those shocks have a proportionally greater effect in Europe and Japan, but not so much in the energy independent United States.

What does a strong dollar mean for Americans?

For Americans, the purchasing power of the dollar is greater and consumption will remain strong. More people are likely to travel abroad. Imports are cheaper, so they will import more. But it is clear, if that happens, that the rest of the world is happily financing the country’s current account deficit. (A “current account” is a record of a country’s transactions with the rest of the world, including imports, exports, payments and other transfers. And a deficit occurs when spending exceeds production, leaving net imports) .

What does the rise of the dollar mean on an international scale?

It’s not necessarily bad for other economies because if you have a weaker currency, that should help your exports, and that’s how you rebalance the global economy. However, the strength of the dollar is not an exogenous shock, but an endogenous market reaction to the fact that the United States is doing better than the rest.

I don’t think you will see the dollar weaken until there is more convergence in growth or monetary policy. There is a very narrow range in which the dollar can weaken, which usually occurs when China, relative to the trend, is doing better than the United States. Despite better-than-expected first-quarter numbers in China, we’re still not seeing it. And again, geopolitical risks have to go off the map, but everything indicates that there will still be geopolitical risks between now and the US elections.

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