#usdollar #usdollarratetoday #useconomy Hello and welcome! Maybe you have been following the news regarding the dollar, but the dollar is sure on the rise! Since the beginning of 2022, the U.S. dollar has gone from strength to strength, reaching historic highs. By July only, the USD had appreciated 15% against the Japanese yen, 10% against the British pound, and 5% compared to China's renminbi. It also hit parity with the Euro, which means that now $1 is equal to 1 Euro, for the first time since 2002. In this video, we will be looking at the drivers behind this robust growth of the U.S. Dollar and the implications it has for people living inside and outside the United States. Rising Inflationary Pressure During the COVID19 lockdowns, businesses were cutting production capacity in order to match the decreased demand. Economic output declined by 31% from April 2020 to June 2020. The economy was preparing for even lower demand in the coming months, hence companies rolled back investment and their supply chains. Post the government's $1.3 trillion relief package and reduced interest rates by Fed, U.S. citizens had enough money to bring back their expenses to pre-pandemic levels. Policymakers at Fed had predicted inflation to stay in the target range of under 2%, reaching 1.8% at the end of 2021. They were in for a shock as inflation reached a 39-year high of 7% in January 2022. Russia-Ukraine Adds to Inflationary Pressures Around the same tensions were brewing between Russia and Ukraine around the issue of the latter's membership in NATO. The situation now required immediate actions by the Fed, and so it responded by increasing the federal funds rate to 0.4% on 17th March. By increasing interest rates in the economy, the Fed is trying to raise the cost of credit to discourage borrowing and hence reduce spending in the economy. With less demand for goods, the prices of goods will stabilize. Since March, the Fed has further increased this rate, and it now stands at 2.4%. Why USD? The interest rate hikes have led to a rise in the yields of U.S. Treasury Bonds, relative to bonds of other G10 countries that had not increased their interest rates. The Bank of Japan is maintaining its short-term interest rates near zero as demand is Japan still has not returned to pre-pandemic levels. It is also important to understand how the global political situation is affecting investor sentiments. The Russia-Ukraine crisis has been termed by some political analysts as the start of the Third World War. Investors who just came out of COVID19 were now faced with this new tragedy. When confronted with such uncertainty, investors always find the safest assets in which they park their liquidity. The goal of investment at this point is not higher profits, but it is to protect the value of their investment, and hence they buy dollars, gold and U.S. treasury bonds. After the Bretton Woods Agreement, the U.S. dollar became the world's reserve currency, backed by the world's largest gold reserves. While other countries back their currencies against their accumulated reserves of U.S. dollars. In addition to that, the high demand for the dollar is supported by the U.S. Implications The U.S. itself exports raw materials for various industries, and these products will become more expensive abroad, raising the cost of production in those countries. The global supply of wheat is already disturbed because of the war in Ukraine, the key exporter or wheat, along with Russia. Immediately after the invasion commenced, the Price of wheat increased from $7 to $13 per bushel. So emerging economies are also threatened by food price inflation. A lot of the investors in emerging economies have pulled out their investments from their businesses and bought dollar-denominated securities, which are practically risk-free. This outflow of investment can cause a rise in unemployment in those countries. As per the World Bank, a sovereign debt crisis looms over the developing world. A lot of these countries have borrowed in U.S. dollars and have committed to pay in U.S. dollars based on the exchange rate at maturity. These countries will struggle to repay these debts. We already have an example in the form of Sri Lanka, which recently defaulted on its debt payments. Granted that the economic problems they had were structural in nature, a rising dollar and oil price contributed to pushing their economy over the edge. The authorities are now struggling to maintain order in the country, and the public has taken to the streets to express their discontent. Recently, Pakistan, a country with nuclear weapons situated in a politically unstable region, was on the verge of defaulting on its external debt. If the dollar keeps rising unchecked, then living standards around the globe will further drop, especially in third-world countries.