US Dollar Strengthens as Interest Rates Rise

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As the team's Capital Markets Analyst, Jacob conducts market and investment research and assists in the development of business strategy to serve our clients more effectively.
February 28, 2023

The Dollar year to date is up 1.71%, and up 3.07% month to date. That may not be that dramatic compared to what we saw in 2022, but it actually is just for different reasons. Since the beginning of the year economic data has been pointing towards steady inflation, which is not the Fed’s idea of falling inflation especially at 4.5%.

And therein lies the story of the dollar’s comeback.

Currency pricing works like this.

Interest rates and economic strength. The stronger the economy the more reliable and stable the debt denominated in that currency is, and the higher the interest rates on that debt denominated in that currency the more investors it will attract.

The US has the strongest economy and one of the highest interest rates in the developed world. That meant everyone around the world wanted to hold that debt/US dollars. And when everyone in the world wants something the price/value rises.

In late 2022 the value of the US dollar started to fall to lower highs, the average value on the dollar index is around $90-$95, because the narrative around the future of the Fed’s interest rate hikes became clearer, likely pointing to lower rates.

Now that future has become more uncertain pointing towards higher rates.

So if you are tracking with me the dollar began to fall in late 2022 because investors saw that the interest rates on the dollar would fall, causing them to seek out other choices, where rates were still rising (like in Europe). And now that the outlook on rates is rising, so again is the dollar.

The dollar falling led to massive international out performance in the last quarter of 2022, as their cost of doing international business dropped massively.

Everything from stocks, bonds, currencies, inflation, etc is affected by interest rates. Interest rates control the world we live in.

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