Economics commentary # 3

Title of article Why is the US dollar so strong?

Source of article Shaban, Hamza. “Why Is the U.S. Dollar so Strong?”

The Washington Post. WP Company, September
30, 2022.

URL from which the article came https://www.washingtonpost.com/business/2022/09/30/strong-

dollar-vs-pound-euro/

Date of article September 30, 2022

Word count 795

Date the commentary was written December 4th, 2022

Section of the syllabus the article relates to Global Economics

Key concept Interdependence

Full article
ECONOMY

Why is the U.S. dollar so strong?

By Hamza Shaban
September 30, 2022 at 11:42 a.m. EDT

Nearly every major currency has lost ground against the U.S. dollar this month, an offshoot of
the Federal Reserve’s campaign to rein in inflation through higher interest rates. For
Americans, a stronger dollar means cheaper imports and trips abroad. But it can also weigh on
other economies, especially in the face of global conflict, because most commodities are
priced in dollars, making necessities like oil and wheat more expensive. The same is true of
public debt, bumping up the cost of interest payments.
This year, the greenback’s value has jumped nearly 20 percent according to the U.S. Dollar
Index, which measures the currency against a basket of significant trading partners, including
the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc.
The dollar’s surge has put other nations trying to boost their economies in a challenging
position: raising interest rates would boost their currency but also put the brakes on economic
recovery. China, which has slashed interest rates to tackle a slowing economy and stem a
housing downturn, has seen the yuan fall to its weakest level in more than 14 years.
Meanwhile, inflation is reaching record levels. The rate of price increases in the euro zone is
expected to surge to 10 percent in September, data showed Friday.
From London to Tokyo, people are feeling the effects of diminished purchasing power as
governments try to combat inflation and a weakened currency. Here’s how the dollar’s rise
has affected some of its biggest trading partners.

British Prime Minister Liz Truss is off to a rocky start since she took on the role in early
September. The government is navigating soaring public debt, sinking investor confidence
and a cost-of-living crisis. The death of Queen Elizabeth II earlier this month amplified the
sense of instability even as the Bank of England said it is watching volatile financial markets
“very closely.”
American visitors may remember the late 2000s, when the exchange rate with the British
pound was closing in on $2 — but the sterling hit an all-time low of $1.03 this week,
following the government’s decision to enact sweeping tax cuts to spark economic growth.
The weakened pound will make life harder for Brits in many ways, increasing already inflated
imported food prices and jacking up energy bills, since about half of the gas used in the
United Kingdom is imported from the international market.
The stronger dollar is good news for Americans considering a European vacation or buying
goods abroad. But the euro’s retreat also hints at the slower pace of global trade, adding to
recession worries. This summer, the euro and U.S. dollar reached parity for the first time in
two decades.

For all the criticism the Fed has drawn for acting too slowly to tackle inflation — it has since
raised interest rates five times this year — other central banks have taken even longer to act,
including the European Central Bank. Euro-zone officials also are grappling with the energy
and world hunger crisis sparked by the Russian invasion of Ukraine, and the broader fallout.
Ukraine and Russia are among the world’s top producers of grain, cooking oil and fertilizers,
and the Russian invasion sent prices skyrocketing and ignited shortages of food staples around
the world.
For the first time since 1998, Japan intervened in currency markets this month to buy yen and
sell dollars, a move aimed to boost the local currency.’

In contrast to their American and European counterparts, Japanese officials are determined to
keep interest rates low, to fuel the country’s fragile economic recovery from the covid-19
pandemic. But that’s driving the yen’s plunge against the dollar.

Japanese people are feeling the effects: A weaker currency makes it more expensive to import
fuel and food, and workers saw their real wages shrink as prices rose, Reuters reported earlier
this month. A depreciating yen and stalling consumption could undermine Japan’s economic
gains, which have lagged compared with those of Europe and the United States. The yen is
among the worst-performing currencies against the dollar this year.
Canadians who travel into the United States for gas and groceries will notice that their dollars
won’t go as far, and Canadian businesses that import American goods or buy commodities
priced in U.S. dollars are also feeling the squeeze. The slide of the Canadian dollar, known as
the loonie — for the bird on the one-dollar coin — will also play a prominent role as winter
approaches. Canadians who make the yearly trek to sun-soaked states like Florida, Arizona
and California may have to abbreviate or skip their visits as the prices for lodging and dining
have also swelled.

Canadian currency has fared better against the greenback than its European peers, but its
decline accelerated this month as concerns set in that the Bank of Canada won’t raise interest
rates in line with the Fed. Runaway prices are still a huge concern for the U.S. Federal
Reserve, which is expected to roll out more rate hikes, but central bankers to the north are
expected to pull back.
Sweden consistently scores high in quality-of-life rankings, with extensive social benefits and
claims of one of the highest GDP per capita figures, marshaling a highly skilled labor force.
But inflation is sinking its teeth into the nation’s economy, which is expected to contract next
year, pummeling businesses and households.

Consumer and business sentiment sank to its lowest level since the first summer of the
pandemic, according to new data this week. And while a weakened krona makes Swedish
exports more attractive to international buyers, rising inflation, climbing interest rates and
surging energy costs tied to the war in Ukraine are eating into household budgets.

Last month, the nation’s central bank, the Riksbank, raised interest rates a full percentage
point, an aggressive move to tame rising prices, and the biggest rate hike from Stockholm
since 1992. But just a day after the Riksbank’s move, the Federal Reserve announced its third
consecutive 0.75 percent rate hike, outpacing other central banks in the race to curb inflation
and driving the losses of other currencies. The Swedish crown has since fallen to its lowest
levels against the dollar, as the Fed continues its muscular tightening policy, outpacing central
banks around the world.
As much of Europe faces economic turmoil and the threat of recession, the Swiss franc, like
the U.S. dollar, has served as a safe-haven asset. When Russia first escalated tensions against
Ukraine earlier this year, investors flocked to the Swiss franc, which is seen as a safe store of
value amid global crises, owing to the nation’s political stability and economic policy. But it
has still lost some ground to the dollar. Compared with their European neighbors, the Swiss
people are feeling far fewer effects of a weaker franc against the dollar, further solidifying its
reputation as a go-to asset during turbulent times.

But the Swiss are getting pinched by rising prices. Last month, inflation hit its highest level in
nearly 30 years. In response, the Swiss National Bank followed other European nations and
the United States by raising interest rates, ending what had been the nation’s seven-year run
of negative interest rates.

Currency data is from Yahoo Finance as of September 27.

Editing by Karly Domb Sadof and Kate Rabinowitz.
The yellow highlighted text in the article are the parts of the article that my commentary will
concentrate on

Commentary
The examples that have been highlighted from the text show, how interdependency between
governing bodies from different nations affect a specific governing body’s firms and
households. The difference between US dollars dependency on specific energy and food
source, compared to the Euro and Pound dependency on one specific energy and food source
can be seen in the Euro and Pound against the US dollar. Interdependency refers to how all
economic actors across nations interact with each other. An exchange rate refers to a
currencies value set to another currencies value and the willingness to trade at these values
will impact the currency values themselves. Governing body is used instead of government to
include the EU, in which the majority of countries use the euro.

(E1;Q1) represent the current equilibrium price. The S1 curve shift to the right to the new position of
S2 curve represents an increased interest or demand for US goods. So the new equilibrium will be
(E2;Q2). The reason for this shift is due to the EU countries having an increased demand for foreign
goods. This big increase in imports from the US has created a large demand for the US dollar as trade
deals are being done for LNG gas from US to the EU. We will also be able to see this increase in
demand for foreign goods in the UK as the UK has also started importing more foreign goods from the
US. In this case they have also started importing more LNG gas.

In this case we can see how interdependency for Russian energy resources from the EU member
countries and the UK has caused a necessity to find new energy resources. The deep dependency for
Russian energy sources has created a frantic search for trade deals as Russian sanctions from the UK
and EU increase. This is why there has been an increase for new energy sources imports from the US.
The dependency that the UK and EU member households and firms have from their respective
governments has increased the demand for these essential raw goods.

One of the main problems for the UK and EU member countries is that they have had a dependency
for Russian energy resources for many years an infrastructure has been built between these countries
to facilitate the increasing demand since the 1990s. The disadvantages of having a partner like Russia
is that there is an autocracy lead by Vladimir Putin so the policy and the actions of this country can
change very quickly and can be unpredictable at times, which can cause ethical strains, when trading
with countries like this. The ethical strain experienced in 2022 is due to the Ukraine and Russia
conflict, which has forced the EU member countries and the UK to put sanctions on Russia. In turn
this has forced them to decrease their dependency for Russian goods. The advantage of having a direct
supply and infrastructure with Russia is that the energy resources that are being bought are more
affordable compared to other alternatives. When a good is more affordable it creates less strain for
other stakeholders like consumers, households and firms.

The short-term effects of switching the providers of energy resources in such an unexpected manner
are increased costs. The advantages of switching to an energy provider like the US are that there are
less ethical strains and the conflict happening in Ukraine is not being funded by the EU member
countries and the UKs dependency on Russian goods. All stakeholders are affected, when an essential
good like energy has an increased cost. Households are dependent on this good for heating their homes
during the colder periods of the years and firms need energy resources to continue making their
products. Unfortunately, due to an increased cost in manufacturing the goods and providing services
an increase in prices must happen or firms will start to go under. The stakeholders in the end, who are
most affected by this increase in cost of everyday goods and services are the consumers and workers,
as they have an increased cost both in household maintenance and, goods and services.

The long-term affects of switching to a different energy provider in the short-term will have an
increase in the variability of energy sources that will have to be found in the future. For the EU
member countries and the UK this can be an increase in green energy sources. If more green energy
sources are to be made in the future, then the EU and the UK will be able to provide enough energy for
their firms and households in the future and any future events that could impact the prices of raw
goods will not have such a big impact on the countries currencies as can be seen in 2022.