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Why the US Dollar Continues to Strengthen and What Are the Impacts? page all

JAKARTA, KOMPAS.com – The US dollar hit its strongest point in two decades when compared to other major currencies.

That means buying US dollars will be much more expensive, and US dollars can buy other currencies in larger quantities, such as pounds, euros, or yen.

This will certainly affect business and household affairs around the world.

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How strong is the US dollar?

BBC INDONESIA The US dollar hit its highest point in 20 years.

The dollar index (DXY) — which measures the US dollar against the average of six other major currencies including the euro, pound sterling and yen — has risen 15 percent in 2022.

With that measure, the US dollar is now at its highest level in 20 years.

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Why is the US dollar so strong?

The US Federal Reserve has raised interest rates several times this year to counter rising prices. As a result, the cost of borrowing money becomes more expensive.

On the other hand, you will get more money if you want to liquidate financial investment products such as US government bonds –which are definitely attractive to investors.

Bonds are medium-term and long-term debt securities that can be traded.

Bonds contain a promise from the party issuing the Securities to pay interest (coupon) in the form of interest (coupon) in a certain period and pay off the principal at the end of the specified time, to the buyer of the bonds. These financial investments are generally considered very safe.

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There is a rush to buy US Government bonds on Wall Street.GETTY IMAGES via BBC INDONESIA There is a rush to buy US Government bonds on Wall Street.

In July 2022 alone, foreign investors bought US government bonds worth 10.2 billion US dollars (Rp 154 ​​trillion), and now it has increased to 7.5 trillion US dollars (Rp 113 quadrillion).

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Investors have to buy US dollars to get these bonds, and the demand also increases the value of the US dollar.

When an investor decides to sell another currency to buy US dollars, the value of that other currency falls.

Meanwhile, the pound sterling plunged to its lowest level after the British Government announced hefty tax cuts.

Investors also tend to buy US dollars when the global economy is under pressure, because the size of the US economy and region makes the dollar a safe haven or safe assets. It also increases the value of the US dollar.

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Many economies in Europe and Asia are struggling due to falling gas prices caused by the conflict in Ukraine.

The US has not been hit hard by rising energy prices. Even though the economy has shrunk in the past six months, US businesses are still hiring – something that is seen as a sign of investor confidence in the local economy.

However, a strong US dollar actually hurts US companies that make money from various regions of the world, such as Apple and Starbucks.

It is estimated that American companies trading on the S&P 500 stock market index could lose $100 billion in international sales.

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What effect does a strong dollar have on countries with weak currencies?

Many currencies in the world have fallen against the US Dollar.BBC INDONESIA Many currencies in the world have fallen against the US Dollar.

Countries with weaker currencies can benefit from a strong US dollar, because these countries provide services and sell goods to the US at lower prices. That is the same as hoisting exports.

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However, it also means that goods imported from America become more expensive.

Since oil prices are traded in US dollars, fuel prices are currently more expensive in many countries around the world.

In Kenya, for example, the shilling fell to a record low against the US dollar. Fuel prices have also increased by almost 40 percent since the beginning of 2022.

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Governments and companies in many countries also often borrow money in US dollars rather than their own currency because it is more stable.

Because when the value of the US dollar increases, it will be more expensive to pay the debt if using local currency.

The Argentine government was hit hard by the strengthening dollar.

The country has also temporarily banned imports of goods, including cruise ships and whiskey, to protect foreign exchange reserves.

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What about migrant workers who send US dollars?

A stronger US dollar makes fuel prices more expensive in countries like Kenya.GETTY IMAGES via BBC INDONESIA A stronger US dollar makes fuel prices more expensive in countries like Kenya.

Every year people working abroad send about 625 billion US dollars (Rp 9.4 quadrillion) to their home countries. These remittances are vital to the local economy.

Foreign workers in the US alone are estimated to send about 150 billion US dollars per year: more than 30 billion US dollars to Mexico, 16 billion US dollars to China, 11 billion US dollars to India and the Philippines.

The stronger the US dollar, the more other currencies it can buy. This makes the recipient of US dollar remittances better.

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Bernadette Cruz lives with her three sons in San Jose City in the Philippines.

The family relies on dollars that her husband, Fred, sends from New York – where she has worked as a nurse for the past 18 years.

Meanwhile, the dollar exchange rate has risen 13.5 percent against the Philippine peso. “All commodities are rising in price in the Philippines, including food and services,” Bernadette said.

“But the dollar being high, really helped me buy the things we needed. The money made the sacrifices of my husband who was abroad even more valuable.”

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What are countries doing to a strong US dollar?

Many countries in the world are trying to increase the value of their own currency by raising interest rates.

In Argentina, the central bank’s benchmark interest rate is currently 69.5 percent. In Ghana 19 percent, Nigeria 14 percent, and in Brazil 13.75 percent.

However, higher interest rates make it more expensive for entrepreneurs and households to borrow money.

Companies can struggle to grow and are very likely to lay off workers. Meanwhile, households are forced to reduce spending.

In turn, conditions like this can cause the economy to slip into a recession.

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