The U.S. dollar has been on the rise over the past few days.
One reason for the spike is that currency markets seem to be expecting an interest rate hike from the Federal Reserve later this week following the Bureau of Labor Statistics’ report from last week that inflation rose 3.4% year-over-year.
If that interest rate hike comes, it will drive up the yields on certain assets, including short-term government Treasury bills.
“That means that investors can earn more by investing in those assets, and so they are more interested in holding them,” said Carol Osler, professor at the Brandeis International Business School.
Critically, investors need American currency to put money into assets, Osler said.
“You’ve got to get the dollars, which means they’re going to go into the very-active market for dollars,” she said. “They’re going to be selling euros, selling yen, selling Brazilian real … and when there’s more people trying to buy our currency, the value goes up.”
Still, with everything that has been happening in the U.S. recently, the dollar might not seem like such a good spot to park your money. As global currencies compete against each other, it’s not like the dollar is looking the fittest it has ever been, said Eswar Prasad, professor of trade policy at Cornell University.
“It’s just the least worst of all the teams playing in the tournament,” Prasad said.
He said that despite the blows the U.S. economy has been hit with recently — namely, tariffs and the war in the Middle East — it still looks less beat up than many other economies, including the European Union, which hiked its own interest rate last week.
“The eurozone, Japan, the United Kingdom are all in a pretty deep economic and institutional funk,” Prasad said.
But the effects of a Fed interest rate hike on the dollar could be short-lived.
“A hawkish Fed is good for the dollar,” said Jonas Goltermann, chief markets economist at Capital Economics. “The problem the dollar has with the Fed is, even if they’re hawkish in the short term, are they going to be hawkish six or 12 months from now?”
Goltermann said he gets real ambivalent vibes from this Fed around interest rates. And he said, like with anything in life, doing something half-heartedly tends not to work out as well as when you’re all in.
