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What will the growth of the dollar lead to
On July 13, the euro and dollar exchange rate reached parity for the first time in over twenty years. A little more than an hour later, another jolt still occurred. A rise in interest rates of one whole percentage point was implemented by the Bank of Canada. After ten hours had passed, the Monetary Authority of Singapore entered the foreign exchange market and made an announcement about an attempt to raise the value of the Singapore dollar relative to the dollar. The dollar, the currency that drives global commerce, is on the run with few parallels in modern history. This is because the dollar is the currency that fuels global trade.
Some indicators suggest that the dollar's value has recently reached an all-time high. Since the middle of 2021, it has appreciated by 15% concerning a group of currencies. Because it acts as a lubricant for global business, its ascension is becoming increasingly noticeable in everyday life worldwide. Even though it is only calculated from the end of 2004, the Bloomberg Dollar Spot Index achieved a new high this month and set a new record. The ICE US Dollar Index, which measures the dollar's performance compared to other developed currencies, is still far lower than the levels reached in the 1980s.
A recovery of 54% would be required to bring it back to the level it reached in 1985, the year that the Plaza Accord was signed. This year has seen the lowest value for the Indian rupee, the Chilean peso, and the Sri Lankan rupee. Profits for oil producers and exporters of raw materials, as well as those of multinational businesses, can be boosted when the dollar is high. Tech behemoths that bring a portion of their revenues from overseas back to their home country of the United States have taken a financial blow. Microsoft Corporation and International Business Machines blamed the high dollar for maintaining a cash-flow strain on their businesses. Microsoft Corporation stated that the currency was eating away at its profitability.
Stephen Jen, a former currency strategist at Morgan Stanley, is the one who came up with the concept of the Dollar Smile. According to one school of thought, the currency's value strengthens during times of rapid expansion in the US economy, while it declines during times of more moderate expansion in the US. There have been periods when the dollar has strengthened, such as in 2016 or 2018, when the Federal Reserve attempted to tighten monetary policy. However, the most recent data shows that inflation in the United States is at a level that has not been seen in forty years, which means that the Federal Reserve has less space for maneuvering.
The fall of the euro is expected until the end of 2022
Edouard de Langlade, a member of EDL, anticipates the possibility of a ‘bear market' for the euro. He contends that the dangers associated with the Russian gas supply would cause record inflation, which will force aggressive rate rises when the economy is in a recession and cause Germany to potentially balk at the expense of maintaining the euro zone's unity. “Europe is on the verge of calamity, which might lead to the continent's fragmentation,” he warned. “It's a very real possibility.” The European Central Bank (ECB) is beginning a cycle of increasing interest rates, revealing the weaknesses of the several economies that comprise the euro region. The possibility exists that traders may bet against the bonds of more indebted nations, such as Italy, which will result in an increase in the interest rates those nations must pay to borrow money.
The European Central Bank (ECB) has introduced a mechanism that would enable it to buy the bonds of countries experiencing rising sovereign rates to mitigate the consequences of the situation. However, the costs associated with doing so may be too high, according to de Langlade's argument. “Europe does not have a single treasury, and the cost of keeping Europe together is high,” you say, “and the cost of maintaining Europe together is high.”
Interest in business in the EU is weakening
As worries of energy shortages continue to hound consumers and companies in the eurozone, confidence in the region's economy has reached its lowest point in about 18 months and a half years. After reaching 103.5 in the previous month, a gauge prepared by the European Commission dipped to 99 in July. As a result of households' concerns over the future, consumer confidence took the lead in the downward trend and reached an all-time low.
