The US dollar is not a tide that lifts all boats. We saw that clearly earlier in April as an elevated US dollar, driven to a six-month high against a basket of other currencies by a repricing of US interest rates, exposed pockets of currency stress in Asia. The Japanese yen and Korean won dropped to historic lows, and other currencies, ranging from the euro to the renminbi, have tumbled since.This is not the highest the dollar has reached — it peaked higher in September 2022, when a surprise rate jump and Russia’s war in Ukraine spurred dollar demand. But unlike 2022, when investors flocked to the dollar amid a global tightening cycle, a stubbornly hot American economy now contrasts with a disinflationary global backdrop. With markets now betting that US interest rates will remain high while rates fall elsewhere, investors will choose the dollar to latch on to better returns and supercharged American growth. This threatens to create more upward pressure on the value of the dollar, with risks for the global economy.
First, a strong dollar alters trade flows, with the potential to renew global inflation. It raises America’s purchasing power, allowing US consumers and companies to snatch up goods from other economies. This may export inflation to countries that have already begun to quell rising prices, as local consumers and companies must pay more for dollar-priced goods. Commodity prices have also moved in line with the dollar since 2020, according to the Bank for International Settlements.
Trade shifts may be especially destabilising for the US. A strong dollar makes imports more appealing, while exports are priced out of foreign markets. This may undermine President Joe Biden’s manufacturing stimulus and his battle with the persistent US trade deficit. It could also undercut efforts to de-risk supply chains from China, potentially leading to more tariffs and tension. A stronger dollar paired with a deflating Chinese economy could allow Chinese goods to flood the market, especially in critical sectors where China already has an edge on prices.