Commentary
Financial markets are currently lacking a clear direction, leading to minor fluctuations that create market noise. Recent events in the currency market have seen non-U.S. dollar exchange rates depreciating. The Euro’s decline can be attributed to the rise of extreme right-wing parties in election polls, while the Japanese Yen’s depreciation is linked to the Bank of Japan’s failure to manage market expectations effectively. The Chinese Yuan’s depreciation reflects a bleak outlook. Despite these factors, the U.S. dollar has emerged as a strong currency.
Although many experts have predicted a decline in the U.S. dollar, it continues to trade near its historical high. The dollar index (DXY) has remained above 100 for the past two years, a significant deviation from its usual range of 80 to 100 since 1967. The U.S. dollar has been on an upward trend since 2008, maintaining stability in world trade invoicing, central bank reserves, and financial denominations.
The strength of the U.S. dollar is influenced by various factors, not just political or economic ones. While higher U.S. interest rates contribute to the dollar’s strength, global inflation and interest rate trends impact all non-U.S. central banks similarly. Any interest rate differentials are more likely due to time lags and technical factors rather than global divergence. The widespread use of the U.S. dollar in international transactions suggests that its value is influenced by global economic conditions.
While the U.S. may prefer to maintain a strong dollar, current circumstances might warrant a weaker currency to benefit the economy. Data shows that GDP growth moves inversely to DXY growth over both medium to long-term and cyclical periods. A weaker dollar is favorable for economic growth in various time frames, indicating that a strong dollar may not be in the U.S.’s best interest.
Most financial assets are denominated in U.S. dollars, making risk perception a key factor in determining the dollar’s strength. The recent strength of the U.S. dollar could be a reflection of global risk aversion. Despite efforts by central banks to intervene, the effects have been temporary.
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Overall, short-term currency fluctuations have minimal impact on the global economy as long as the DXY remains within a range of plus or minus 10 percent. At the sovereign level, these fluctuations are not a significant concern.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
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