Why is the U.S. dollar so strong?

From left, a U.S. $100 bill and a Japanese 10,000 yen. (Tomohiro Ohsumi/Bloomberg)

Nearly every major currency has lost ground against the U.S. dollar this month, an offshoot of the Federal Reserve’s campaign to rein in inflation through higher interest rates. For Americans, a stronger dollar means cheaper imports and trips abroad. But it can also weigh on other economies, especially in the face of global conflict, because most commodities are priced in dollars, making necessities like oil and wheat more expensive. The same is true of public debt, bumping up the cost of interest payments.

This year, the greenback’s value has jumped nearly 20 percent according to the U.S. Dollar Index, which measures the currency against a basket of significant trading partners, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

The dollar’s surge has put other nations trying to boost their economies in a challenging position: raising interest rates would boost their currency but also put the brakes on economic recovery. China, which has slashed interest rates to tackle a slowing economy and stem a housing downturn, has seen the yuan fall to its weakest level in more than 14 years. Meanwhile, inflation is reaching record levels. The rate of price increases in the euro zone is expected to surge to 10 percent in September, data showed Friday.

From London to Tokyo, people are feeling the effects of diminished purchasing power as governments try to combat inflation and a weakened currency. Here’s how the dollar’s rise has affected some of its biggest trading partners.

Pound

British Prime Minister Liz Truss is off to a rocky start since she took on the role in early September. The government is navigating soaring public debt, sinking investor confidence and a cost-of-living crisis. The death of Queen Elizabeth II earlier this month amplified the sense of instability even as the Bank of England said it is watching volatile financial markets “very closely.”

American visitors may remember the late 2000s, when the exchange rate with the British pound was closing in on $2 — but the sterling hit an all-time low of $1.03 this week, following the government’s decision to enact sweeping tax cuts to spark economic growth.

The weakened pound will make life harder for Brits in many ways, increasing already inflated imported food prices and jacking up energy bills, since about half of the gas used in the United Kingdom is imported from the international market.

Euro

The stronger dollar is good news for Americans considering a European vacation or buying goods abroad. But the euro’s retreat also hints at the slower pace of global trade, adding to recession worries. This summer, the euro and U.S. dollar reached parity for the first time in two decades.

For all the criticism the Fed has drawn for acting too slowly to tackle inflation — it has since raised interest rates five times this year — other central banks have taken even longer to act, including the European Central Bank. Euro-zone officials also are grappling with the energy and world hunger crisis sparked by the Russian invasion of Ukraine, and the broader fallout. Ukraine and Russia are among the world’s top producers of grain, cooking oil and fertilizers, and the Russian invasion sent prices skyrocketing and ignited shortages of food staples around the world.

Yen

For the first time since 1998, Japan intervened in currency markets this month to buy yen and sell dollars, a move aimed to boost the local currency.

In contrast to their American and European counterparts, Japanese officials are determined to keep interest rates low, to fuel the country’s fragile economic recovery from the covid-19 pandemic. But that’s driving the yen’s plunge against the dollar.

Japanese people are feeling the effects: A weaker currency makes it more expensive to import fuel and food, and workers saw their real wages shrink as prices rose, Reuters reported earlier this month. A depreciating yen and stalling consumption could undermine Japan’s economic gains, which have lagged compared with those of Europe and the United States. The yen is among the worst-performing currencies against the dollar this year.

Canadian dollar

Canadians who travel into the United States for gas and groceries will notice that their dollars won’t go as far, and Canadian businesses that import American goods or buy commodities priced in U.S. dollars are also feeling the squeeze. The slide of the Canadian dollar, known as the loonie — for the bird on the one-dollar coin — will also play a prominent role as winter approaches. Canadians who make the yearly trek to sun-soaked states like Florida, Arizona and California may have to abbreviate or skip their visits as the prices for lodging and dining have also swelled.

Canadian currency has fared better against the greenback than its European peers, but its decline accelerated this month as concerns set in that the Bank of Canada won’t raise interest rates in line with the Fed. Runaway prices are still a huge concern for the U.S. Federal Reserve, which is expected to roll out more rate hikes, but central bankers to the north are expected to pull back.

Swedish krona

Sweden consistently scores high in quality-of-life rankings, with extensive social benefits and claims of one of the highest GDP per capita figures, marshaling a highly skilled labor force. But inflation is sinking its teeth into the nation’s economy, which is expected to contract next year, pummeling businesses and households.

Consumer and business sentiment sank to its lowest level since the first summer of the pandemic, according to new data this week. And while a weakened krona makes Swedish exports more attractive to international buyers, rising inflation, climbing interest rates and surging energy costs tied to the war in Ukraine are eating into household budgets.

Last month, the nation’s central bank, the Riksbank, raised interest rates a full percentage point, an aggressive move to tame rising prices, and the biggest rate hike from Stockholm since 1992. But just a day after the Riksbank’s move, the Federal Reserve announced its third consecutive 0.75 percent rate hike, outpacing other central banks in the race to curb inflation and driving the losses of other currencies. The Swedish crown has since fallen to its lowest levels against the dollar, as the Fed continues its muscular tightening policy, outpacing central banks around the world.

Swiss franc

As much of Europe faces economic turmoil and the threat of recession, the Swiss franc, like the U.S. dollar, has served as a safe-haven asset. When Russia first escalated tensions against Ukraine earlier this year, investors flocked to the Swiss franc, which is seen as a safe store of value amid global crises, owing to the nation’s political stability and economic policy. But it has still lost some ground to the dollar. Compared with their European neighbors, the Swiss people are feeling far fewer effects of a weaker franc against the dollar, further solidifying its reputation as a go-to asset during turbulent times.

But the Swiss are getting pinched by rising prices. Last month, inflation hit its highest level in nearly 30 years. In response, the Swiss National Bank followed other European nations and the United States by raising interest rates, ending what had been the nation’s seven-year run of negative interest rates.

Currency data is from Yahoo Finance as of September 27.

Editing by Karly Domb Sadof and Kate Rabinowitz.

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