Still the King, the U.S. Dollar Throws Shade at Currency Weaklings

The premise that the dollar is the world’s safe haven is a constant in this ever-changing world. It’s certainly proving true this year. The U.S. Dollar Index, known as the DXY and measuring the dollar’s value against the world’s major currencies, is at its highest since July 2020 and looks poised to surge even more, fueled by eyewateringly high U.S. inflation and a resurgent economy. Both increase pressure on the Federal Reserve to bring forward interest-rate hikes, in turn raising the relative attractiveness of the dollar.

The currency market rule of thumb with a stronger greenback is that it hurts economies — particularly in fragile emerging markets — that are reliant on commodity imports priced in dollars. The flipside of this is that commodity and hydrocarbon-exporting economies receive a foreign exchange boost. But big exporting powerhouses such as the European Union and Japan also benefit when their currencies are relatively cheaper to the dollar. The European Central Bank is certainly not protesting the slow, steady weakness of the euro as it tries to recover from the pandemic.