Much of the recent rise reflects differences in monetary policy
. First, what is driving it? . At the turn of the year, the Federal Reserve became more determined to tackle inflation. A series of interest-rate increases since then, with more expected, has turned the dollar into a high-yielding currency. Lofty interest rates are a draw to global capital, which in turn has pushed up the dollar.
In short, the dollar is the go-to currency largely because America has proved a reliable source of economic growth. That is particularly true now. Europe is edging closer to recession. The closely watched purchasing-managers’ index suggests the euro-zone economy shrank in August. So is the dollar now a problem? In principle, its strength is a remedy for unbalanced global growth, since it gives European and Asian exporters an edge over domestic producers in the stronger American market. In practice, a strong dollar makes matters worse. It squeezes global credit, because countries and companies beyond America’s borders borrow in dollars. So when the dollar rises, it becomes more expensive to pay back debts out of local-currency revenues.
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