Dollar Skyrockets Following US Inflation

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The COVID-19 pandemic has caused an economic downturn in numerous countries, including the U.S. While America has seen recovery in certain respects, The Guardian remarked that there is also inflation occurring in the US, with the prices of consumer goods having risen at an annual rate of 6.2% in October. Meanwhile, the core rate of goods that exclude food and energy has increased to 4.6%. These are alarming rates since they are the highest recorded since 1990 and 1991, respectively.

Despite the steep inflation rates, however, the US dollar has been rising in value. To understand this phenomenon, here’s what you need to know:

The US Inflation Affected the Forex Market

A country’s inflation rate is a major factor that can impact the country’s currency and, by extension, its rates of foreign exchange with other nations’ currencies. Many forex traders were speculating that the US dollar would depreciate given inflation and other economic struggles in America. Considering that the US dollar is one of the most traded currencies in the world, they expected rates to favour other currencies going up against it.

However, as our article US Dollar Predictions 2021 from Two Investment Giants highlighted, the timing and the pace of the dollar’s recovery surprised investors. The delay in global growth synchronisation became beneficial for the dollar’s growth, proving its resilience against other currencies. However, there are other factors contributing to the dollar’s rise in value as well. While inflation can affect the US dollar’s value, central banks can also fight against inflation by adjusting their interest rates through their economic control policy. Accordingly, the Federal Reserve is accelerating the value of the dollar through its hiking cycles. These have caused the US dollar index to appreciate, with a gain of about 3.1% during the first seven months.

As one of the most popular currencies in forex, the rise of the US dollar has also affected other currencies on the market. As an example, the sterling GBP is at its lowest since December 2020, having depreciated by 0.31%. The dollar also achieved gains against the Swiss Franc, which was last up 0.40%. Additionally, the Australian and New Zealand dollars took hits from USD’s spike – the former down to 0.46% while the latter dropped to 0.54%.

Investors Are Following Different Trading Plans

Recognising the impact of US inflation on the forex market, a number of investors are planning their next moves. Case in point: Billionaire hedge fund manager Paul Tudor Jones pays attention to the Federal Reserve policy meetings to gauge the outlook of the market. The Fed officials have remained adamant that the rising prices caused by inflation are temporary, since economic recovery in the US is well underway. Though Jones has a different stance on inflation, he states that investors have the green light to bet on every inflation trade if the Fed maintains its stance.

The hedge fund manager’s advice has some weight to it. For those unfamiliar with him, the book Market Wizards highlights Jones as one of the trading scene’s superstar money-makers – a proven market expert recommended among the best in the game. Jones is particularly famous for his global macro trades and his prediction of the stock market crash in 1987.

On the other hand, Luc Filip has been buying oil to protect the investments of the clients he manages. The head of investments at SYZ Private Banking in Switzerland, Filip is investing in oil since commodity prices rise alongside inflation. It’s a more direct way of playing the markets during times of inflation, even if energy futures may stand to stagnate or lose value in the event that inflation extends longer than expected.

In spite of inflation, the US Dollar’s value is skyrocketing due to the movement of the global economy and the Federal Reserve’s movements. That said, investors would do well to plan their strategies in case the current economic climate persists, taking inspiration from fellow traders.

If you want more guidance for your forex trade during this period, check out our other resources at FXWatcher. Our professional forex analysis will guide you in making the best strategies for your trade.

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