What Does a Strengthening US Dollar Mean- THE US DOLLAR INDEX

There is a lot that has been going on globally, and there is a little trend that could have easily slipped by the radar. The US dollar has been strengthening since the beginning of March 2021, against its largest trading partners excluding China. In the year 1973 the US federal reserve created a US dollar index which measures the strength of the dollar against, the Euro, Japanese Yen, Pound Sterling, Swiss Franc, Canadian Dollar and the Swedish Krona.

The US dollar index started at a base of 100 and hence if one is looking at it historically if its at 80 points it means that from the base year the US dollar is weaker by 20% to the basket of currencies and if it is at 112 points this means it is 12% stronger.

If we look at the US dollar index from late February to end of March 2021 you will realize it moved from 90.01 points to 93.23 points as highlighted below:

Source: Bloomberg Markets

That is a 3.6% gain by the US Dollar against the 6 currencies. What does an increase US dollar index mean? The US dollar is key because most commodities are priced in the US dollar. An increase in the US dollar index leads to a fall in commodity prices. Why is this so? If maize is priced in Dollars and the US dollar strengthens against your local currency call it the South African Rand, it means you will need more Rands to buy the same quantity of maize. If the product is not essential what will happen is demand for the maize will reduce leading to a reduction in its market price so that the quantity purchased goes back to the same level before the increase of the US dollar.

However, for products like Oil which countries need as an essential an increase in the US dollar will lead to using more of your local currency to buy the same quantity of Oil and the pump price will go up at your local fuel station.

If the US dollar continues to strengthen then we are entering a cost push inflationary period. This is inflation due, not to increased demand, but increased costs and it is not a good inflation because local central banks do not have any tools to deal with this kind of inflation.

What does that mean to you? Well life might become a bit more expensive for us as prices of basic commodities might begin to increase, cost of energy, transport, and manufactured goods. If economic laws do hold then we should see a gradually increase in interest rates especially in developing countries causing the cost of credit to rise. However, this presents an opportunity for good, fixed income investments.

We have looked GDP , Employment Numbers, Sovereign Credit Ratings and now US Dollar or currencies. We will continue building our What Does it Mean tool kit so that you can see, hear and act on the news that comes around you, to be able to make better informed personal and business financial decisions.

Published by kadzutu

passionate about the communitys financial prosperity

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