3 Reasons Why the U.S. Dollar Is Once Again the Undisputed King in 2022.
Always announced in decline, the U.S. dollar emerges stronger from the crises the world is experiencing.
Since the beginning of the year 2022, finally, only the ruble has been doing better than the US dollar. However, as far as the ruble is concerned, everyone knows that it is only an illusion due to the manipulation of the Russian central bank. The US dollar is back in the limelight.
The DXY, an index that compares the greenback to a basket of other currencies, is at a 20-year high:
It has climbed by nearly 10% in 2022, 13% over one year. The dollar is close to an all-time high against the euro (the eurodollar is at $1.05 compared with a low of $1.03). It is at its highest level since 1998 against the yen. And let's not forget gold and cryptocurrency. If Bitcoin loses 55% since January 1 and gold remains stable despite the weighty economic context, it is partly because the dollar gains 10% over the period.
The first explanation for the rise of the US dollar is technical: it is the consequence of the rise in interest rates. The value of the US dollar, like any currency, depends on supply and demand. The supply here is the quantity of US dollars in circulation. This is monitored by the Fed.
To fight inflation, the Fed has raised rates three times since the beginning of the year, by a total of 150 basis points. In doing so, it is reducing the amount of U.S. dollars in circulation. This is a decrease in supply.
Moreover, the higher the rates (Fed policy rate, US government bond rate), the more investors will want to invest in this currency. This is an increase in demand.
You are familiar with the principles governing the law of supply and demand. Here, demand for the U.S. dollar is increasing, while supply is decreasing. Logically, the value of the U.S. dollar increases.
The US dollar is still seen as a safe haven
The U.S. dollar also benefits from its safe-haven status. In times of crisis, the value of the U.S. dollar tends to appreciate, as investors sell their risky assets and turn to monetary investments in a trusted currency.
And the dollar is still largely the reserve currency of investors and economic agents. For example, more than 58% of central bank reserves are still denominated in US dollars:
Although the end of the U.S. dollar king has been announced for years, and it is something that I have announced in the past, the U.S. dollar benefits from the absence of credible alternatives to remain the king.
America's Energy Independence
Finally, if the dollar is so powerful, it is also because, against all predictions of decline, the United States has emerged strengthened from the latest crises. Since the beginning of the war in Ukraine, it is America that is in the driver's seat in the Western camp. It is America that leads the sanctions against Russia and that supports massively Ukraine, taking back de facto its role as world gendarme.
Another consequence of the war in Ukraine is the energy crisis. And here again, America is the big winner. Unlike Europe, the United States is independent and even an energy exporter. From now on, they will even sell more and more gas to Europe to help it do without Russian gas.
America kills two birds with one stone by selling more gas to Europe and by strengthening its influence on Europe. Nobody talks about a common European defense anymore. Everything will go through NATO with the purchase of American military equipment, which will benefit the American military-industrial complex which has been looking for a new war since America left Afghanistan in August 2021...
To this, you can add full employment in America. Of course, many predict a recession by the end of 2022 or early 2023 in America, but this will impact the whole world anyway. America inspires more confidence than ever, which is why the US dollar has been popular since the beginning of 2022.
In the future, the situation could potentially change, as some see the emergence of a Bretton Woods III, backed by outside money, gold, commodities, and even Bitcoin. However, at the time of writing, the US dollar is still the king of currencies.
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