The Rise of The Dollar

So. Why did the USD rise so much this year??

Think of it like this: when there is hail, would you walk in the open? Or try to find shelter somewhere.?

The world right now is in disarray. High inflation, rising interest rates, war. This is the hail. And as an investor, when there is turmoil in the market, you’d go for safety.?

This is what the USA is to investors right now. It is not to say that the USA doesn’t have its issues. It does, but it’s the better bet amongst other developed countries.

• In the UK, you have the uncertainty of the new prime minister, Liz Truss.?
• In Europe, you have Russia and Ukraine and soaring gas prices.
• In China, you have the zero-COVID policies in major cities affecting demand and thus their economy.?

The Fed has also been increasing interest rates aggressively to try combat inflation.?

(A quick refresher: Think of inflation as an overheating economy. Too much money chasing a limited amount of goods, forcing prices to go up. When the inflation rate is high, interest rates are increased to make borrowing more expensive and savings more attractive. If people and companies are not borrowing to spend, and entities are saving more, then the economy cools down).

So because the Fed is increasing interest rates, investors globally see the US as serious in combatting inflation and go there. Moreover, increasing interest rates means more returns when they invest in treasury bonds in the US.

So it is more to do with, "The US being the best bet because everywhere else is in shambles".?

So what do investors do? They demand dollars to make dollar investments. Their demand is what makes the USD surge.?

Now, who are the winners and losers of this rise in the USD?

Winners

Americans Importers: Now that their currency is strong, they can buy a lot more outside. Imagine you are an American with USD in your bank account and you want to order something from Japan. If you order stuff online, you can buy more now because you hold a strong dollar against, the Japanese Yen.?

US Travelers: If you leave America to come to Botswana to see Maun, you have a stronger currency and can buy more stuff and have a more luxurious holiday.

Losers

Exporters: if you are an American company exporting, this means your goods are more expensive to people outside. If Walmart sold something for $100 to someone in Botswana when the exchange rate was $1:BWP10, the person in Botswana paid P1000. But now, if that thing still costs $100, the person in Botswana will pay P1339 because the rate is at $1:BWP13.39.?

Because things are now expensive to outsiders, they might do less business with American companies or stop doing business altogether.?

So a strong USD hurts exporters in America and also importers in other countries (cause now things are more expensive for them).?

Multinational Companies: if you are a multinational company with a global foot print, and send the money back to the US, then you earn less because now the profits you make abroad are less in USD. For example, if company A had presence in Botswana, and made a profit of P1,000,000 when the rate was $1:BWP10, the USD equivalent was $100,000. But now at BWP13.39:$1, that same profit is $74,683.?

Conclusion??

Have exposure to hard currencies (like the USD) or investments denominated in hard currencies. When uncertainty hits markets, people flock to safe places. The USD is seen majorly as a safe haven. Also, even in times of peace and calm, international investments may fare better than local investments. I am not saying take all your money abroad. I am saying diversify and have exposure to both local and international assets/currencies.