frankel139_KAZUHIRO NOGIAFP via Getty Images_yen dollar exchange KAZUHIRO NOGI/AFP via Getty Images

In the Dollar We Trust

Surging inflation and an ongoing economic slowdown should have hurt demand for the US dollar, and yet the greenback is at a 20-year high. The US economy’s relative strength and the Fed’s rapid monetary tightening will likely keep the dollar strong for some time.

CAMBRIDGE – Despite rampant inflation and slowing growth, the US dollar keeps going from strength to strength. Since May last year, the greenback has risen by 28% against the yen and 20% against the pound. It has appreciated 19% against the euro, reaching parity for the first time since 2002.

On a weighted-average basis, the dollar is the highest it has been in 20 years. In fact, when judged against a broad set of foreign currencies, it is even higher now than it was in 2002. You would have to go back to 1983-85 to find a time when the dollar was clearly stronger.

In a sense, the dollar’s recent rally may seem puzzling. After all, surging inflation and the ongoing economic slowdown should have hurt demand for dollars. But the greenback’s current strength can be explained by the relative resiliency of the US economy and the Federal Reserve’s ongoing commitment to raising interest rates.