According to the U.S. Dollar Index, which compares the dollar to six major currencies, the United States Dollar (USD) has increased in value by 14 percent in the past 12 months. This increase is correlated to the Federal Reserve’s decision to increase short-term interest rates by half a point instead of their usual quarter point. The Fed’s plans, which were made official on May 4, 2022, included the use of the Fed’s nine-trillion-dollar financial emergencies reserve. These plans were made with the aim of decreasing inflation in the U.S., which is why the Federal Reserve will most likely continue to increase interest rates and dip into its $9 trillion reserve. As a result, the dollar’s worth will increase internationally, creating a turbulent environment for investments and sparking economic recession in other countries.
Due to the pandemic and global conflicts, many countries have recently undergone economic recessions. Specifically, after Russia invaded Ukraine, many countries placed economic sanctions on Russia in order to incentivize an end to this conflict. In terms of the pandemic, many countries, including the U.S., suffered an economic recession due to supply chain issues. Supply chain issues increased costs for items such as food and gasoline in some countries as the cost and difficulty of international transport increased. Along with importing goods, the U.S. also exports gasoline and food. Therefore, travel restrictions also negatively impacted the country’s economy through restrictions on exports.
The U.S. is building itself back up from its pandemic recession at an extremely rapid rate. This growth is so marked that the economic growth of other countries have been impaired by the steep increase in value of the U.S. dollar. In fact, as the dollar has risen, the Japanese Yen has decreased 11.7 percent, both the Euro and the British Pound have decreased 7.5 percent, and the Chinese Yuan has decreased 3.5 percent. The Federal Reserve has become a part of this issue, as they have decided to increase interest rates to help with inflation in the U.S.
In the 1980s, when Paul Volcker was the president of the Federal Reserve, he increased interest rates dramatically with the aim of ending inflation at the time. As a consequence, the Plaza Accord was established in 1985. This accord lessened the trade deficit of the U.S. and increased the value of the Japanese Yen and the German Deutsche mark. However, Japan suffered economic deflation soon after, which consequently made the dollar skyrocket relative to the Japanese Yen. That said, the decrease in value of foreign currencies and the simultaneous dramatic rise of the dollar in recent weeks brings back memories of the 1980s and measures to keep the dollar in check.
Similar to how the dollar was initially weakened with the Plaza Accord, the U.S. might suffer an economic recession after this peak. In fact, the U.S. gross domestic product’s annualized rate depreciated by 1.4 percent in the first quarter of this year. However, this recession could take a long time to be fully realized. It might not even happen at all, which means the dollar could keep rising in value at the expense of other nations.
By Carolina Tieppo