The Rise of USD: What does it mean?

Updated: Aug 22


Around 10 years, one US Dollar could be exchanged for around 50 Indian rupees or around 0.7-0.8 euros. In the past month, the US Dollar and the Euro hit parity, with one dollar equaling 0.97 Euros. The US dollar now equals almost 80 Indian Rupees (INR). The US Dollar has lately risen in value, but what does it mean, and how does it impact the global economy?



The Rise:


The main player in the rise of the dollar is none other than the Federal Reserve, otherwise known as the Fed. Due to the concerns about inflation within the US, the Fed has put out a strong plan to combat it by hiking interest rates faster than other nations around the globe. Rising interest rates cause investors to invest in the US economy, as higher interest rates mean higher returns. The US economy is seen to be stronger than that of Europe due to the Ukraine conflict, as also countries like China, which still face the impact of COVID-19 restrictions. This also drives foreign investors to start pouring money into the US economy, as a better-performing economy indicates higher returns. Currently, the Fed’s actions and the strong economy have been working, as the PPI (Producer Price Index) and CPI (Consumer Price Index) has shown that inflation has been reducing. The majority of investors now believe that the Federal Reserve will not raise the interest rates by 75 basis points at their next meeting, but instead by 50 basis points.



The Winners:


The rising USD value comes with a mixed impact; there are winners and losers. There are three main groups facing benefits from the value rise, highlighted below:

  • Tourists from the US get a lot more of a foreign currency for the US dollar. For example, I am now able to receive more Indian rupees for 1 US dollar than my previous visit around 3 years ago. American tourists are able to buy more in foreign countries.

  • Companies that the US tourists buy from also benefit. The US tourists will spend this additional foreign money they receive, causing a boost in revenue for these companies. Some brands expect to increase sales by hundreds of millions of dollars due to the fluctuations in these currencies.

  • The Federal Reserve is achieving its own agenda and also lowering import prices. Import prices have been dropping throughout the summer, meaning the Fed is able to achieve its goal of counteracting rising inflation.



The Losers:


There are also several losers due to the rising dollar, mainly seen in the foreign markets. These are seen below, in three main categories:

  • Europe and other countries facing an economic slump will now face additional struggles due to the rising dollar price. Commodity prices, such as oil (which is denominated (priced) in dollars). Any country in debt that is denominated by dollars will face the additional strain, as they have to pay more in their currency.

  • Emerging markets that contain a strong US presence, also face the strain. Emerging markets with low reserves of their currency are more financed by the US dollar and are now required to pay higher interest rates. Emerging markets with higher debts face even higher interest payments, meaning additional strain.

  • The future has more pressure against other world banks. Central banks of other nations have to match the Fed’s aggression and lower the detrimental effects the dollar has against their currency.



Corporations - a mixed signal:


Multinational corporations, such as Microsoft, are facing mixed signals from this. Most mention that the rising dollar results in rising foreign prices (If the US price was 70 dollars when 70 Indian rupees equaled 1 USD, that amounts to 4900 INR (Indian Rupees), but that now could be around 5600 INR). A general law in economics is that a 10% jump in USD causes US-based multinational firms to face a 1% loss in profits. Though this is the case, Microsoft and other corporations that have a particularly strong presence in other countries will not convert the foreign currency back to a dollar. They will instead re-invest their revenues in these foreign markets in resources to build their presence there.



The Future:


In an economy that has become more uncertain than ever, the future is unclear based on the current rising dollar. The dollar is poised to face a decline this coming week due to inflation concerns and the new sentiment at the Fed’s meeting in September. Some officials from the Fed aim to hike interest rates up another 75 basis points, instead of the most probable target of 50. The US dollar has no clear effect on the equity markets, but investors are eager to see what the dollar brings as many see a possible downfall/decline.



Thank you for reading this week’s article! It was written by our new member Mahanth. He is a student from India and is passionate about finance and cryptocurrencies.

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