(Source = Yonhap News)

The value of the U.S. dollar is at its highest in two years… The rate of increase is ‘the largest in more than 7 years’

(Source = Yonhap News)

The US dollar recently hit a two-year high. This is because the demand for safe-haven assets has soared amid growing economic uncertainty as the US Federal Reserve (Fed) is expected to raise interest rates over this year and next year.

According to the Financial Times (FT), the dollar index, which measures the value of the dollar against six major currencies, rose to 101.8 on April 25 (local time). This is the highest level since March 2020. As the US consumer price inflation rate hit a 40-year high, the prospect that the Fed will push interest rate hikes to catch up with steep inflation (inflation) seems to be triggering the dollar’s appreciation.

Analysts expect the US Federal Reserve to raise its benchmark interest rate to 2.7% by the end of the year. This is a sharp increase from the 0.8% projected at the beginning of the year.

Yields on U.S. Treasury bonds are also rising as the Fed raises interest rates steeply compared to central banks in major countries. One of the factors contributing to the rise in the dollar is that foreign investors began to buy US Treasury bonds. When foreigners sell their currency to buy U.S. Treasury bonds, the value of that country’s currency depreciates and the dollar increases in value as demand increases.

Intensifying disruptions in international supply chains caused by Russia’s invasion of Ukraine and China’s tightening containment over the COVID-19 pandemic also contributed to the dollar’s appreciation. It is analyzed that the so-called ‘dollar smile’ phenomenon is occurring, in which the demand for safe assets increases and the demand for the dollar, a representative safe asset, increases rapidly as concerns about the global economic slowdown increase.

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