The Dollar And Inflation

According to the Wall Street Journal, the dollar has strengthened against other currencies this year. As of May 16, the dollar index rose:

• 7% against the Chinese yuan
• 12% against the Japanese yen
• 10% against the Swiss franc

Having a strong dollar isn’t always a good thing. It makes our exports more expensive. On the other hand, it makes imports less expensive which is a good thing during an inflationary period.

One of the reasons for the strong dollar is the interest on the treasury bonds is higher than other countries making it attractive to foreign investors.

Other reasons for the strong dollar include:

• Russia’s invasion of Ukraine
• Lockdown in China because of a renewed outbreak of COVID
• Growth in the U.S., according to the International Monetary Fund is projected at 3.7% compared to China at 4.4% – the closest growth rate between the two countries. This growth rate continues to support a strong dollar.

If the dollar remains strong, it is one of the variables reviewed by the Fed in favor of slowing interest rate increases.