For a few $$ more: Signals from the rising greenback

livemint.com:

Mint takes a look at one of the most important price signals of the global financial market: The US dollar, the world’s de facto reserve currency, has been gaining strength since the beginning of this year. A currency is considered “strong" when it rises in value against other currencies in the global foreign exchange market. The ICE US Dollar Index, which measures the greenback against a basket of six major currencies, is up around 4% in 2024 so far, though it is still some distance away from the levels witnessed in the early 2000s.

The dollar has gained against almost every major currency this year, an unusually strong trend which demonstrates its primacy in the global financial system. The primary reason is that the US Federal Reserve, the country’s central bank, is keeping interest rates at over 20-year-high levels as inflation is still above its target of 2%. The central bank, earlier this month, left the benchmark interest rates unchanged at 5.25 - 5.50% for the sixth straight meeting.

Higher interest rates mean American assets like Treasury bonds offer better returns than most of the world—and that too at virtually zero risk. US equity markets too are trading at lifetime peaks. These factors have triggered a gush of foreign fund inflows into the US, strengthening the greenback.

A stronger dollar means the currency on the other side of the trade is weakening. Two-thirds of 150 currencies tracked by Bloomberg have weakened against the dollar this year, including the euro, rupee and yuan. This raises the cost of imports as global trade is dollar-denominated.