November 9, 2022

How a Strong U.S. Dollar Is Affecting Foreign Currencies

The U.S. Federal Reserve has repeatedly raised interest rates this year—a policy decision that has given the American dollar a boost in the forex market.

Between March and September 2022, the Fed raised interest rates on five occasions, bringing the interest rate between 3% and 3.25%. Another rate hike, which will mark this year’s sixth raise overall, is expected on Nov. 2.

These interest rate hikes have affected the value of the U.S. dollar, which has in turn affected the value of forex currencies. Rising interest rates have attracted foreign investors to the dollar and influenced foreign banking policies, leading world currencies to lose value against a relatively strong U.S. dollar.

Perhaps most notably, the euro lost parity with the dollar on Oct. 27 as the European Central Bank (ECB) raised its own interest rates. The euro also lost parity with the dollar at various other points this year for the first time since 2002.

On Oct. 7, the British pound fell below 1.1120 GBP per dollar, its lowest level since 1985. Though the pound’s losses were partially influenced by events in Britain (such as recent tax decisions, government borrowing, and Brexit), the strength of the U.S. dollar was one factor in the asset’s decline.

During the week of Oct. 20, the Japanese yen fell to 150 JPY per dollar, the weakest that it has been since 1990. Whereas the Federal reserve is rapidly increasing interest rates, the Bank of Japan has committed to very low interest rates. Both trends may contribute to the weakness of the yen.

Elsewhere in Asia, the Chinese yuan fell below 7.3 CNY per dollar on Oct. 24—a level not seen since 2010. The fact that the People’s Bank of China ended a series of yuan fixings, along with the strength of the dollar, likely contributed to a weakening of the yuan.

Finally, the Indian rupee fell to a record low of 82 INR per dollar on Oct. 5. The strength of the dollar played a role in those losses, alongside other issues such as the Russia-Ukraine war and investor interest in foreign stocks.

These trends mean that foreign investors might choose to buy the U.S. dollar to take advantage of its relatively strong position—or continue holding the dollar if they own it already.

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