December 6, 2022

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The US dollar: This is why concerted action is needed

The US dollar has crushed all other currencies this year. The overwhelming strength of the dollar has a very specific matrix: the Federal Reserve. The US central bank moved decisively in an absolute battle against inflation that resulted in a series of interest rate increases starting in March 2022.

The institute headed by Jerome Powell started on the sly with 0.25% pressure, but when he realized that consumer prices were continuing to rise uninterruptedly, he stepped on the accelerator, first with a 0.50% increase and then three successive 75 basis point increases. All this helped to strengthen the US currency, as it raised the return on dollar assets.

The US currency, at a stage characterized by strong market tensions, also benefited Asset Shelter. The other major safe-haven currency, the yen, has pledgedThe Bank of Japan’s insistence on maintaining an accommodative monetary policy and negative rates (the only central bank in the world).

The pound fell when the government introduced a maximum tax cut plan to support families and businesses with high bills while the euro was devastated by the energy crisis.

The US Dollar: The Failed Attempts of Japan and Great Britain

A super dollar is not entirely good for US companies, which end up with profits earned abroad Resized by swap effect. Foreign companies buying dollar-denominated goods are not happy either.

The above leads to the conclusion that the strength of the dollar must stop. When the USD/JPY pair reached 146 yen, the Japanese authorities had to carry out the first direct intervention in the currency market since 1998. However, the effect of strengthening the yen and devaluing the exchange rate was short-lived.

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The Bank of England hit the market on Wednesday 28th September to curb gold speculation and as a result tried to stabilize the British Pound. Here too, the British currency recovered itself from an all-time low of 1.0350 it had hit against the dollar earlier this week, but the situation appears to be precarious.

The US dollar: coordinated action inevitable

So what should be done? For Stephen Barrow, chief strategist at Standard Bank, this is essential Coordinated action between central banks. Under the current circumstances, the expert believes that coordinated intervention is inevitable. The last time this happened was in 1985, when there was the Plaza Accord. However, the difference is that at that time the United States was emerging from a period in which it had defeated inflation, while the battle for the rising cost of living was just beginning.

Barclays analysts think so Markets may underestimate the inflationary impact of a stronger dollar on the rest of the world. This is because most trade is done in dollars and therefore “currency movements against the dollar tend to have an immediate and significant effect”.