The three largest components in the index’s basket of currencies—the euro, Japanese yen and British pound—have all slumped 15% to 25% against king dollar over the past 12 months.
Exchange-rate movements are driven by an amalgam of factors including interest rates and monetary policy, inflation and economic growth, trade balances and perceived geopolitical risk. For example, higher U.S. interest rates and aggressive Fed monetary tightening help to strengthen the value of the dollar. So does the relative strength of the U.S. economy compared with Britain, the eurozone and Japan.
And the tragic war in Ukraine only raises the risk profile in Europe. “When things go bad, generally the dollar trades as a safe haven, and today there is a shortage of safe havens,” says Brent Donnelly, president of Spectra Markets, a macroeconomic and currency-trading adviser.
Perhaps the greatest source of downward pressure on the euro and pound this year is the Russian invasion of Ukraine, which has severely disrupted the supply of oil and natural gas to Europe. European countries now face a nasty energy crisis and a cold, dark winter ahead. The eurozone’s ill-considered dependence on the kindness of Vladimir Putin for the supply of natural gas through an extensive pipeline network emanating from Russian gas fields has backfired. The price of gas and electricity in Europe (including in Britain) has skyrocketed to stratospheric levels, with the price of imports of energy and other raw materials escalating far faster than the export price of, say, a BMW. The U.S., a net exporter of energy and agricultural goods, is in a much stronger terms-of trade position.
This story is from the November 2022 edition of Kiplinger's Personal Finance.
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This story is from the November 2022 edition of Kiplinger's Personal Finance.
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