When it comes to the economy, there are a lot of moving parts. Interest rates, inflation, and international trade all play a role in determining the strength of a nation’s currency. Right now, the US dollar is on the rise. Here’s why experts such as Kavan Choksi say that trend will likely continue in the months and years ahead.
The dollar up until now
The US dollar has been on the upswing since early 2018. While there have been a few bumps along the way, the trend has been positive overall. And several factors point to the continued strength of the US dollar in the months and years ahead.
One of those factors is interest rates. Right now, US interest rates are at 2.5%. That’s higher than many other developed nations, including Canada (1.75%), Japan (0%), and much of Europe (-0.5%). As a result, investors are more likely to put their money into US-based assets, which creates demand for the US dollar.
Inflation is the rate at which the prices of goods and services rise over time. In the United States, inflation has been relatively low in recent years, averaging around 2%. While some economists would like to see inflation closer to 3% or 4%, most agree that low and stable inflation is good for the economy. One of the main reasons for this is that higher inflation can lead to higher interest rates, which can drag on economic growth. In addition, volatile inflation can cause consumers and businesses to cut back on spending, leading to slower economic growth. That’s why central banks try to keep inflation in a “sweet spot” of around 2% – not too high or too low. As long as inflation remains relatively low and stable, that’s good news for the US economy.
The United States currently has a large trade surplus with the rest of the world. That means more money flows into the country than out of it. And when there’s more demand for a currency than supply, that puts upward pressure on prices. Inflation is one of the main concerns of the Federal Reserve, and a trade surplus can lead to higher inflationary pressures. The Fed may respond by raising interest rates, leading to a stronger dollar and potentially lower exports. Therefore, the trade surplus is an important factor to watch to gauge the economy’s overall health.
A continued upward trend
Piecing all of these factors together, it’s clear that there are several reasons to believe that the US dollar will continue to rise in value against other currencies in the months and years ahead.
Investors looking to take advantage of this trend may want to consider investing in USD-denominated assets such as stocks, bonds, and real estate. In addition, businesses that do a lot of international trade may also want to consider hedging their exposure to foreign currencies by using forwards or options contracts.
Of course, no one can predict exactly how currency markets will move in the future. But at least it looks like things are shaping up nicely for the good old greenback.
The trend right now is strong growth for the USD, so experts expect this pattern keeps up in light of recent events unless something drastic changes.