The unique aspect of currency valuations is that they represent a zero-sum game: our currency can only be stronger relative to your weaker currency.
The US Dollar has been trending higher against European & even Chinese currencies. This is a function of the Fed’s aggressive rate hikes which are attracting foreign investors who are converting their domestic currency holdings into higher-yielding dollar-denominated bonds. A defense of the dollar represents the only plausible explanation of why the Fed has been hiking rates – it is certainly not to slow consumer demand during a recession.
In the meantime, European currencies have become a mess after a series of sanctions against Russia inadvertently ended up punishing the continent. Now without access to its primary fuel supplier (Russia), economic conditions have become dire. Further, a drop in the Euro makes imports that much more expensive, adding to already overwhelming inflationary pressures. To make matters worse, the UK decided to cut taxes while simultaneously increasing debt-funded government spending, adding even more downward pressure on the British Pound.
The Chinese Yuan has even moved lower against the dollar given an unexplainable zero covid lockdown policy which has shut down the country’s industrial production.
The US is currently winning the currency war which is necessary for the US Dollar to retain its status as the global currency reserve. It is important to understand that this objective is currently more important to the US government than any risk of recession.
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