Even after dropping 6% in the past week or so, the US dollar has been on an absolute tear this year. The US dollar measured against a basket of other currencies is up a little over 10% year to date, and this rise is pushing up inflation around the world.
A strong US dollar affects prices outside the US in three main ways:
- Prices of most major commodities – for example oil, wheat and corn – are priced in US dollars, which makes it more expensive for people and companies outside the US that convert their local currencies to US dollars to buy them.
- US multinational companies price many of their goods and services in US dollars (making them more expensive in local or have increased prices in local currencies so that their USD revenue doesn’t take too much of a hit.
- A strong US dollar squeezes companies and governments that have borrowed in US dollars – it now takes more of their local currency to pay off their US dollar debt.
This article from Fortune puts the impact of a strong US dollar into focus and explain why it greatly increases the chance of a global recession next year. Despite this, the US Federal Reserve appears fixated on bringing down inflation at home, meaning more interest rate rises and an even stronger US dollar to come.
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