Rise of the US dollar: Déjà vu all over again?

Ramkishen S Rajan and Bhavya Gupta

JUXTAPOSED against the recent sharp selloffs in the much-hyped cryptocurrency markets has been the turbo-charged US dollar (USD). While the surge in the USD comes amid an already worsening global macroeconomic environment, it is not without precedent. Previous periods of sustained appreciation of the USD have occurred from mid-1980 to mid-1985; mid-1995 to early 2002; a short-lived period during the Global Financial Crisis (mid-2008 to early 2009); and mid-2014 to late 2016.

What has led to this persistent strength in the USD? Recent announcements and actions by the US Federal Reserve (Fed) to raise interest rates in response to growing inflationary pressures has no doubt been a major contributing factor. Fed hawkishness has driven up the USD vis-à-vis its advanced economy counterparts like the Eurozone and Japan which have chosen to delay interest rate hikes. Indeed, on a bilateral basis, the USD is at a two-decade high against the Japanese yen and a five-year high against the Euro.