Seven Reasons the US Dollar is Still Rising

The U.S. dollar’s value against other currencies is still trending upwards, even after a 16-month run. 

12 Month dollar value graph screenshot – Source Trading Economics

Looking at the 1 year U.S. dollar chart above, you might be thinking, “It has to end soon.”

But when you look at the 10-year chart below, you see a different picture.

10-Year dollar value graph screenshot – Source Trading Economics

When you put the recent U.S. dollar growth curve into the broader context of the 10-year chart, an imminent crash no longer appears inevitable.

Why is the U.S. dollar rising? 7 Factors underpin the upward trend:

1.Government Statistics

Traders see government statistics as objective evidence that the U.S. economy is on the up. There are plenty of numbers to bolster traders’ optimism, though there are some negative statistics that have the opposite effect.

Screenshot source – U.S Bureau of Labor Statistics

Positive news includes a falling unemployment rate and increased hourly earnings. Both mean that Americans have more money to spend, which will further boost the economy.

Negatives include the upward trend in the Consumer Price Index.

However, the positives outweigh the negatives, so the U.S. dollar benefits.

Inflation worldwide is rising. In Australia, it’s 3%, in the U.S. it’s 6.2%.

2.High Inflation 

You might think inflation is bad news, and it is in many ways, but it is a sign that the U.S. economy is recovering faster than expected after Covid-19. 

The U.S. Federal Reserve is under pressure to cut inflation. Inflation is caused by too much money chasing too few goods. The Fed probably wants to take some money out of the system next year, so is likely to raise interest rates. If people have higher mortgage and other loan repayments they will have less to spend on goods.

3.Interest Rate Expectations

U.S. interest rates are expected to rise in the next few months. 

US interest rates- Screenshot source – BBC

Interest rates have been at historic lows for twelve years! 

Rising interest rates will make it more attractive to hold U.S. dollars. People trading currency price movements on Forex platforms such as Easymarkets always looking ahead. They have included the expected interest rate rise into their currency valuations over the coming months.

Rising rates are also seen as a sign of the confidence the U.S. Federal Reserve has, that an upswing in the economy is imminent.

4.Economic Cycle

The world’s economy goes up and down in a cyclical fashion.

The graph above clearly shows the unusual nature of the unemployment increase caused by Covid-19. Note that THE NBER did not declare this spike to be a cyclical recession.

Experts tell us the U.S. economy is a long way from the next cyclical recession. This is reassuring to currency traders and means the U.S. dollar will continue to increase in value relative to other currencies.

5.Perceived Safe Currency

No currency has an absolute value. Valuations are relative to other currencies. A large part of a currency’s relative value comes down to emotional factors. When traders are anxious, they sell the euro, sterling, and other currencies and buy U.S. dollars. 

The world’s economy is not in a healthy state because of Covid lockdowns, labour shortages, and inflation; traders are anxious, so they sell other currencies and buy U.S. dollars because they see that as the lowest risk option.

6.Exports

When the U.S. economy is in good health, unemployment is low and factories produce more goods both for internal consumption and for export.

U.S. exports are priced in U.S. dollars, so foreign customers will need more dollars to pay for them. The increased demand for U.S. dollars will improve the value of the U.S. currency.

7.Bonds

Central banks, including the U.S. Federal Reserve, have been printing money like crazy to try to increase economic activity and boost their economies. Some have called this process ‘Quantitative Easing’. The Fed has been printing extra money to buy bonds and other assets on the open market. , and has used the term Asser Purchases. Quantitative Easing and Asset Purchases both refer to the same money printing process. 

When banks print money it causes inflation.

The Fed is likely to ease its ‘Asset Purchase’ program over the coming months because the U.S. economy is growing and its extra money printing will be detrimental to the economy’s future health.

Traders see this as good news.

The Short Version

The U.S. is recovering from Covid-19 and the economy is growing again. Most of the economic indicators are positive, so the value of the U.S. dollar is likely to increase over the next year. The 10-year dollar value chart at the start of this article shows us the value of the dollar is nowhere near its maximum. Traders will have confidence in the value of the U.S. dollar because it is still trading within its historic boundaries.