The Value of the Dollar Increases Due to Inflationary Pressures

All the macroeconomic indicators which were supposed to boost the dollar for the United States turned out to be worse than expected. Despite this, the value of the US dollar continues to rise. On Friday, November 12, the DXY dollar index, which compares it to a basket of six other major currencies, reached 95.26, up almost 2% over the previous two weeks. It appears as everything should be in the opposite order. So, what’s the deal with this odd situation? It turned out to be inflation’s quick rise.

As per the Labor Department, the CPI in the United States increased by 6.2 percent in October, the highest level in more than 30 years. Only in November 1990 was inflation higher. The price rise has quickened by 0.8 percent since September, while core inflation (excluding energy and food costs) has surged to 4.6 percent, the highest level in three decades. And it appears that this isn’t the end. Inflation in the United States is expected to climb further in the coming months, owing to rising housing, utility, energy, and automobile prices.

For the sixth month in a row, the CPI, which measures changes in the cost of living in the country, has surpassed the 5% threshold. And this makes us mistrust Fed Chairman Jerome Powell’s guarantees. And this makes us mistrust Fed Chairman Jerome Powell’s claims that high inflation is only temporary. However, not only investors but also the Fed, are skeptical.

Ahead in the Week, Dollar Markets Remain the Main Driver

The previous week’s statistics on US inflation fueled fears that rising inflation would ultimately reduce household living standards. Furthermore, the Federal Reserve is projected to boost interest rates sooner than predicted, according to the markets. The US dollar index DXY was down 0.03 percent against a basket of rival currencies at 95.122 at the close of play, above the day’s lows of 94.997 established in response to consumer mood. It had, however, increased to 95.265, its highest level since July 2020.

In such a situation, the dollar should have weakened dramatically, according to conventional economic theory. The COVID-19 epidemic, on the other hand, has flipped everything on its head, compelling authorities to adopt quantitative easing (QE) programs in the spring of 2020, flooding markets with cheap money and cutting interest rates.

Finally, the Fed announced that it will begin progressively reducing its asset purchase program by $120 billion starting this month. According to Jerome Powell, the moment for a rate hike has not yet come because the labor market has not fully recovered; nonetheless, predictions indicate that it will happen by mid-2022. Until then, the Fed will be patient. Many investors, however, believed that, with such high inflation, the Fed’s tolerance would quickly wear out, and the regulator would be obliged to hike rates before the summer of 2022.