NEW DELHI: The US dollar is at its strongest in past decades relative to other currencies. Means that buying dollars has become more expensive, and a dollar can now buy more pounds, euros or yen than ever before.
The U.S. dollar is strong when the dollar’s value is high relative to other currencies when compared to the historical dollar values. This means one of two things—first, it can mean the dollar is near the top of its historical range, such as the all-time high for the dollar on February 25, 1985, when the dollar hit 164.72, as measured by the U.S. Dollar Index – ICE (DX.F)—one of the few indexes that include historical information about dollar futures, as Wiki Update.
The all-time high was a result of the Federal Reserve (the Fed) raising the federal funds rate (the interest rate used for banks loaning to each other overnight) to combat stagflation (a high rate of inflation combined with economic shrinkage and high unemployment)
The Dollar Index (DXY) compares the US dollar to six other currencies in the world. This includes the euro, pound and yen.
DXY grew 15 percent in 2022. These figures show that the dollar is at its highest in the last 20 years.
Why the Dollar Is So Strong Right Now
The dollar is strong for three reasons. First, the Fed took two actions—it ended its expansive monetary policy (adding to the money supply) as the economy continued to improve following the Great Recession. That move constrained the supply of the dollar, which had the effect of increasing its value.
Second, the Fed also raised interest rates in December 2015, which strengthened the value of the dollar further. A rise in interest rates has the effect of lowering bond yields, which reduces investor interest in U.S. Treasury notes in the short-term. This increased the demand for dollars and let savers earn a higher rate of return on dollar deposits than on euro deposits, which paid lower interest rates.
How does the strength of the dollar affect oil prices?
Oil prices and dollar strength typically move in opposite directions. Most of the global oil market trades in U.S. dollars. As the strength of the dollar increases, nations that use other currencies can’t afford to buy as much. That decreases the demand for oil, which puts downward pressure on the price.