8/8/2023 0 Comments Wall st journal exchange rates![]() The strengthening of the dollar in the wake of the invasion of Ukraine offers one example of this, but there are others as well. This typically leads to a dollar appreciation at times of global turbulence as demand for these assets rises. United States assets, especially Treasury bonds, are viewed as retaining value at times of market turbulence and are also valued because the markets for these assets are deep and reliable. One reason for the strong dollar is that United States assets are seen as a safe haven.As a result, today's value of the exchange rate reflects investors' views of the future as well as current economic conditions. Likewise, a country's currency will appreciate if the demand for its assets increases because of a perception that those assets offer a "safe harbor" at times of heightened uncertainty. ![]() An increase in the interest rates offered by a country's bonds, or the expected future return from a country's equities, increases the demand for that country's currency which leads to an appreciation. An increase in the demand for a country's assets raises demand for that country's currency, which is needed to purchase those assets, causing that country's currency to appreciate (strengthen). The attractiveness of any financial asset is linked to its expected future payout, its reliability, and the ease with which it can be bought or sold. Exchange rates reflect the relative demand for countries' assets and respond to both current economic conditions and expectations of future conditions.To put this in context, these three-month changes would result in annual rates of appreciation of 31 percent, 25 percent, and 50 percent, respectively, were they to continue for an entire year. Just in the three months between the start of the invasion and the end of May, 2021, the dollar appreciated by 7.0 percent against the British pound, 5.6 percent against the Euro and 10.8 percent against the Japanese Yen (see chart). But the trend reversed in 2021 and the appreciation of the dollar with respect to these currencies gained steam after the Russian invasion of Ukraine on February 24, 2022. During the first year of the pandemic the dollar weakened with respect to the euro, the pound, and the yen (represented by lower values of the indexes). Over the past year, the dollar rose by 12 percent against the euro, 9 percent against the pound, and 16 percent against the yen.How has the war in Ukraine contributed to a stronger dollar, and what are the consequences of this appreciation? The dollar's value against six major currencies reached a 20 year high in mid-May. Many economists are predicting the dollar will reach parity with the euro by the end of the year, a value not seen since 2002. The DXY index, a weighted average of the dollar's value against six major currencies, reached a 20 year high in mid-May, having appreciated by 9 percent since February 24th. The dollar has strengthened over the past year, with the most rapid rate of increase occurring since the Russian invasion of Ukraine. Fletcher School, Tufts University The Issue:
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