David Ross

The dollar, a strong currency

The dollar is strong only against those currencies whose central banks were slow to fight inflation. For example, Brazil started increasing interest rates one year ahead of the US, taking rates from 2% to 13.75%. The Peruvian and Mexican central banks have increased interest rates by over 5% while the US has increased interest rates by only 3%.

The currencies of Brazil, Peru and Mexico have all strengthened against the dollar because interest rates are now higher than inflation in those countries. Meanwhile, weaker currencies are found where central banks have been slower to raise rates, such as the Eurozone with only 1.25% of interest rate hikes, the UK with 2.15% of interest rate increases, and Japan with no interest rate hikes. Even the Swiss franc has weakened against the dollar as recent interest rate hikes have come later than in most other economies. Given the dollar’s advantages of being a reserve currency, the basis of most international trade, and a safe haven at times of uncertainty, if investors are also going to be paid more with a higher interest rate to hold a dollar, there will be increased demand for dollars. And that has been what we have seen this year.

Predictions of dollar death always seemed to be more a case of wishful thinking than any realistic review of the situation. Just in terms of liquidity and accessibility, no other currency is competitive, enabling the dollar to keep its status as the world’s reserve currency. As such, there will always be a demand for dollars. Indeed, in a crisis, people all over the world rush to hoard two things: toilet paper and the US Dollar. And it is easier to buy other goods with US Dollars than rolls of toilet paper. There simply is no substitute for the US Dollar and there is no credible alternative available to the world.

The opinions expressed are those of the manager. LFDE cannot be held responsible for them.