$40+
The watermark version: https://www.youtube.com/watch?v=H0lfGzFJS50
The US dollar (USD) has strengthened against most of the major currencies since the Russian invasion of Ukraine, reaching an almost 20-year high in mid-May before easing slightly lower.
The dollar index (DXY), a measure of the currency’s strength against a basket of rival currencies, including the Euro (EUR), Japanese yen (JPY) and British pound (GBP), at the time of writing (7 June) stood at 102.60 – up 6% from the start of the year but down marginally from the 104.76 reached in May, its highest level since 2002.
A challenging geopolitical situation and an inflationary economy have seen investors move to the safe haven of the dollar. In contrast, the Euro’s status has been knocked back by its closeness to the conflict, while the yen has dropped due to loose Japanese monetary policy.
The USD’s status as a safe haven has been boosted by global economic slowdown fears, and expectations of a hawkish Federal Reserve (Fed).
After steadily climbing throughout 2021, the DXY saw a solid start to 2022. The US dollar index has rallied from a low point of 94.63 in mid-January to a high of 104.76 on 13 May – a level that was last seen in December 2002. Since then, the price eased slightly and currently trades 2% off that high.
About 60% of the $12.8 trillion in global currency reserves are currently held in dollars, giving the US an exorbitant privilege over other countries. And that privilege pays: Because US government debt backed by the dollar is very attractive, interest rates are lower. The US gets to borrow from other countries in its own currency — so if the US dollar loses value, debt does too. American businesses can make international transactions in dollars without having to pay conversion fees.
Perhaps most importantly, in extreme circumstances the US can cut off dollar access to central banks around the globe, isolating and draining their economies. Raghuram Rajan, the former governor of the Reserve Bank of India calls this power an "economic weapon of mass destruction."
The US detonated this weapon on Russia in February after the country invaded Ukraine, freezing $630 billion worth of forex reserves and deeply undermining the value of the ruble. That gave America the ability to punish Russia without getting US troops involved in war.
But with great power comes great responsibility: When you use a weapon of mass destruction, even an economic one, people get spooked. To protect themselves from the same fate as Russia, other countries diversify their investments away from the US dollar into other currencies.
That's where the country's reserve currency status could run into problems.
Weaponizing the dollar, said Bank of America's strategist Michael Hartnett, could lead to its debasement. The "balkanization of global financial systems" erodes America's role as the reserve currency, he added.
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