Dataset available on the TI Dashboard.
The Dollars Growth in 2022
The Bank of England’s monthly exchange rate data between the USD and both the Pound and euro shows considerable YTD growth, the Dollar is now 14.8% more valuable vs the Euro when compared to January 2022 and 13% more valuable vs the pound. September alone saw the Dollar rise 10.1% vs the Euro and 7.4% vs the Pound. The DXY, an index of the dollar relative to a basket of foreign currencies has reached a 20-year high with further growth on the horizon.
Growth in the world’s reserve currency has been driven by multiple factors.
1 – Monetary policy undertaken by the US federal reserve to tackle inflation has seen multiple interest rate rises, turning the dollar into a high-yield currency.
2 – High and unpredictable global inflation has pulled people towards the safe-haven of the Greenback.
3 – The US fossil fuel industry is benefitting from high oil and gas prices with US exports reaching a record high of 11.4 million barrels a day.
The Effect on Global Trade:
Whilst a strong dollar makes exports more lucrative for the rest of the world, it also significantly reduces the buying power of currencies it’s strengthening against. 40% of all global transactions are undertaken in USD, thus a stronger dollar means higher commodity prices for buyers across the globe. This will in turn see the volume of commodities demanded fall, whilst also increasing the production costs for firms in effected countries, reducing the volume of outputs produced at current investment levels.
A stronger US Dollar will also further reduce falling consumption in effected markets. The IMF reported that 10% growth in the value of the dollar results in 1% global inflation. With a European continent that is already struggling with rising food and energy prices, European consumers will be further weakened by any upwards trend in the dollar’s value, reducing the volume of imports demanded.
A combination a stronger dollar and rising interest rates are likely to further deter investment in both developed and developing countries across the world. More global debt is held in dollars than any other currency, it’s especially preferred for debt holders in emerging markets where exchange rates of the local currency tend to be volatile and unpredictable. Growth in the strength of the greenback will increase the burden of maintaining this debt and deter further investment and production expansions in the short and medium term. At the same time rising interest rates across developed economies will increase the cost of debt and deter investment and expansion in more developed markets.
In conclusion global financial markets are deterring expansion in global trade as we head further in the Q4.