The U.S. Dollar Sharply Rose Against Most Regional Currencies: Impact at Zoom Level

The U.S. dollar index, DXY, the widely used tool which tracks the greenback against a basket of its trading counterparts, is at 96.26 – a bit lower, than yesterday, but still above levels seen last week, when global markets started the hiccups.

Not only the ill-fated Turkish lira currently trading at 12.12 to USD compared with 11.18 to the dollar a week ago, but many more local currencies are under synchronized pressure as well. Thus, the South African rand also keeps decreasing to USD, shedding more than 1.2% against the greenback overnight, last trading at 16.21 per dollar. The Australian dollar fell to $0.7133, extending losses following yesterday's drop from levels above $0.72.

The fact that periods of acceleration of U.S. dollar strengthening are not necessarily linked to a rising attractiveness of U.S. bonds has been constantly observed. But the dollar is not only an international trade currency and the financial markets’ main benchmark. Dollar is a national currency for the United States, which makes it very impactful on performance of the U.S. economy, the largest economy in the world. Statistics show that when the Dollar Index approaches the 100 level, U.S. manufacturing and export activities sharply slow.

According to a recent data release, the U.S. goods trade deficit, although narrowed in October to $82.9 billion from an upwardly revised historic high of a $97 billion trade gap in September, still remains abnormally elevated. That compared with an average $75 billion monthly foreign trade deficit at the time of Donald Trump’s trade wars, and around $55 billion of monthly foreign trade shortfall before 2016. Healthy foreign trade is, in fact, more important in terms of overall American GDP growth, than it is usually assumed. Although the rise of the Dollar Index above its perceived normal level will certainly curb some domestic inflation, it would hamper the post-Covid economic recovery – especially in the Midwest of the U.S. and the Rust Belt – simultaneously.