The Dollar's Strength or Other Currencies' Weakness?

The Dollar's Strength or Other Currencies' Weakness?

2022-06-27 • Updated

The value of the US dollar continues to rise, but is this because of the strength of the dollar itself or just the weakness of the euro, Japanese yen, and British pound?

Since the beginning of the year, the US dollar index has been up 8.8%, with the Federal Reserve continuing to fight inflation after raising rates three times so far. And so, one by one, major central banks began their battle to tame inflation and keep pace with the Fed's reckless tightening. From here, the dollar soaked its strength, but is it a real strength, or is it due to the weakness of other currencies?

Why is the Japanese yen weak?

The Japanese yen has always been a safe haven for risk-averse investors and traders. But for now, it's not, as the Bank of Japan persists in keeping rates close to 0% while sticking to ultra-easing policies and massive bond purchases. While most of the world is fighting inflation, Japan has struggled with deflation for decades.

However, after the wave of rising prices globally, inflation in Japan finally jumped above the 2% target. Therefore, it's unsurprising to see the yen weakening against the US dollar. So far, the yen has fallen more than 17% after the dollar broke through 136.50 levels for the first time in 24 years. If the BoJ continues its easing policies, the pressure on the Japanese yen will persist.

Why is the Euro weak?

The European Union suffers from very high inflation that has reached 8.1%, its highest level ever. However, the European Central Bank didn't respond to the pressures. Everyone criticizes the ECB for allowing other central banks to get ahead of it. What's more, the ECB's insisting on not hiking rates or ending its bond-buying program.

The euro will feel the most damage because signs of recession in Europe are showing faster than in the US. All of this pushed the euro down, coming close to parity with the USD, after dropping below 1.05 for the first time since 2016.

However, the euro may get some support after the ECB confirms its intention to raise rates at next month's meeting. The euro has fallen against the dollar by about 7.5% through 2022.

Why is the pound sterling weak?

The British pound is suffering from the failure of the Bank of England to control inflation. So far, the BoE has raised rates five times in recent months. But all of these hikes didn't manage to cool inflation in the UK, which reached a 40-year high of 9.0%.

With increasing pressures on the British economy and negative data, the pound's decline against the dollar continued to exceed 9% since the beginning of the year.

Why is the US Dollar strong?

The Fed's tightening cycle and relentless rate hikes have supported the dollar. Foreign investors also sell stocks and bonds to store the money they receive in US dollars.

However, the dollar may lose some ground with other central banks rushing to raise rates. Recession fears may also prompt the Fed to halt or slow the aggressive rate hikes to save the already weak US economy. Therefore, the proof of the real strength of the dollar will appear when the rest of the currencies bare their teeth and the US currency remains steady.

TRADE NOW

Similar

CAD: Markets Await GDP Release
CAD: Markets Await GDP Release

During the Asian session on Wednesday, the USD/CAD pair rebounded after two days of losses, reaching around 1.3590. This uptick is fueled by a stronger US dollar and lower crude oil prices, which put pressure on the Canadian dollar. The decline in Western Texas Intermediate (WTI) oil prices to approximately $80.70 is attributed to...

XAUUSD: Markets Slow Down Ahead of NFP
XAUUSD: Markets Slow Down Ahead of NFP

Gold prices rose on Monday as the US Dollar weakened amidst speculation about potential Federal Reserve rate cuts starting in June. This weakened Dollar was partly due to improved risk sentiment pushing US Treasury yields lower. Despite facing challenges from declining yields, gold prices recovered to nearly $2,170 per troy ounce, driven by the Dollar's weakness. Federal Reserve Chair...

CAD: Signs of Growth May Persist
CAD: Signs of Growth May Persist

Canadian retail sales showed a slight rebound in February, rising by 0.1% after a 0.3% drop in January. However, this failed to fully offset the steeper decline earlier in the year, suggesting a weakening momentum in consumer spending. The increase in February was driven by gains in sectors such as sporting goods, hobby retailers, and building materials. Despite the...

Latest news

USD: Powell Speaks on Cutting Interest Rates
USD: Powell Speaks on Cutting Interest Rates

Jerome H. Powell, the Federal Reserve chair, stated that the central bank can afford to be patient in deciding when to cut interest rates, citing easing inflation and stable economic growth. Powell emphasized the Fed's independence from political influences, particularly relevant as the election season nears. The Fed had raised interest rates to 5.3 ...

WTT: Currency Pairs To Trade In April
WTT: Currency Pairs To Trade In April

Hello again my friends, it’s time for another episode of “What to Trade,” this time, for the month of April. As usual, I present to you some of my most anticipated trade ideas for the month of April, according to my technical analysis style. I therefore encourage you to do your due diligence, as always, and manage your risks appropriately.

Deposit with your local payment systems

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera