In spite of record high inflation, the value of the dollar continues to rise. That may seem like a contradiction, but it actually makes sense in a global context.
The strength of any currency is relative to other currencies. If the price of a dollar increases, it simply means it is more valuable relative to other options.
The price is not a reflection of inherent value in the currency.
Over the past few years, the US Central bank has pumped tons of new money into the economy, leading may to assume this would result in the dollar losing its value (myself included).
However, the opposite has happened. The dollar continues to rise in value, which can feel counter-intuitive.
To understand the big picture, one must step outside the US and look at the global stage.
The dollar is the global reserve currency which means many nations buy and sell goods in dollars.
This creates constant demand for dollars, and when nations have a surplus of dollars, they often invest in dollar “products” – US Treasury bonds, US Stocks, US real estate.
The Fed was not the only central bank to print money, that happened across the world, especially in 2020.
The currencies of many non-US nations have weakened relative to the dollar which creates problems.
Namely, imported goods and payments on debt held in dollars has become more expensive.
Supply chain shortages in many places also contributed to financial problems that are amplified by a strong dollar.
The imported goods in most cases are necessary, so nations are spending a higher proportion of their funds in dollars, which means there is a growing transfer of liquidity from outside the US into the dollar.
The milkshake concept means the non-US nations are injecting their liquidity into this communal glass, and the US dollar is sucking up the value through a straw.
This may be good for people who benefit from a strong dollar, but there will likely be a point when the bubble filled by the straw gets too big and pops.
It’s impossible to predict when that would happen, but there aren’t many other options if the liquidity trend continues in that direction.
In the meantime, we wait and watch the value of the dollar continues to rise, adding stress to nations outside the US.