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The Power of the US Dollar
By: Peter Xiao
David J. Lynch, a journalist for the economy section of The Washington Post, wrote an article on July 17, 2022, about how the U.S dollar has reached its highest level in decades because of the Federal Reserve and its effects.
This year, the dollar has increased on the DXY index by 13%, showing how quickly the U.S bounced back from the pandemic. It proves the Federal Reserve’s anti-inflation project is making progress.
The U.S Department of Labor reported on how the change affected U.S import prices and found that “the price of imports, excluding fuel, dropped in June by 0.5 percent, the second consecutive monthly decline. Over the past year, prices of non-fuel imports rose by 4.6 percent, roughly half of the overall increase in consumer prices.”
The increased value of the dollar is putting a lot of financial stress on other countries. The value of the euro decreased due to the dollar's increase and is causing worse inflation from higher imported goods costs. Germany was especially hit hard, announcing its first trade deficit in 30 years from a weaker currency in combination with rising energy costs.
Financial stress is even more severe in debt-ridden countries. Pakistan, for example, agreed with the International Monetary Fund on a $1.2 billion bailout at the cost of cutting energy subsidies despite that inflation there is at 20%. The IMF is now negotiating with other countries like Tunisia.
Adam Posen, the president of the Peterson Institute for International Economics, talked about the sudden change and said, “The dollar, euro, yen and yuan moved in relatively small ranges for a very long time. This is the first time in decades where everybody’s down against the dollar.”
Unfortunately, not all U.S companies are celebrating the stronger dollar. American products have become more expensive to customers in other countries because of the dollar, causing exporters and oversea earnings to shrink. An example is Microsoft, which stated the stronger dollar “would reduce its expected earnings by around $250 million.”