The greenback has an overarching sway over the financial world.
The US currency is on one side of almost 90% of foreign-exchange transactions and accounts for two-thirds of international debt.
Virtually all international trades in oil are priced in dollars.
The mighty greenback has surged against most other currencies, driven by a combination of higher US interest rates, diverging economic prospects and a hunt by investors for safety.
Against the yen, the dollar hit a mark last seen in 1990, around the beginning of Japan’s so-called lost decade; and against the euro it strengthened to better than 1-to-1 for the first time since 2002, when the common currency was still in its infancy, according to a Bloomberg report.
Relative to China’s currency, the greenback has hit its most formidable level since the 2008 financial crisis.
The dollar now reigns stronger than at any time since the 1980s, according to an index from the US Federal Reserve. By that measure, the US currency climbed more than 10% in the first 10 months of 2022, eclipsing even the highs seen during the Covid-related financial panic of 2020.
Several factors are playing out to bolster the dollar. They include a combination of more alluring interest rates in the US and a feeling for many investors that their money is safer in dollar-denominated assets during troubling times: War in Ukraine, slowing global economic growth and other woes.
The Fed has raised its benchmark rate from near zero to 4% in a mere six months.
In more normal times, global policymakers might welcome a weakening of their currencies, which tends to stimulate growth by making exports more competitive, while encouraging consumers and businesses to buy local.
But the main problem that’s been tormenting finance officials from Frankfurt to Seoul for the past year has been inflation. Weak currencies add fuel to that by increasing the cost of imported products such as fuel and food.
This is a concern for many emerging markets in particular. They tend to lean more on so-called hard currencies like the dollar than on smaller domestic debt markets.
Nations that have chosen to peg the value of their own currencies to the dollar — like most in the Gulf region — face challenges both in maintaining that link and in dealing with the economic fallout of basically importing the dollar’s strength, which weighs on policy and prices domestically.
US Treasury Secretary Janet Yellen has said she believed financial markets were working as they should.
The Fed has been focused on fighting inflation. From its perspective, a strong currency actually helps.
Here’s the flipside of the strong-dollar narrative.
For sure, the greenback looked unstoppable earlier this year when investors were adding to bets on inflation and US rate hikes.
Now they’re turning against it in droves.
Former bulls including JPMorgan Asset Management and Morgan Stanley say the era of dollar strength is ending as cooling prices spur markets to trim bets on further Fed tightening.
The Bloomberg Dollar Spot Index, which tracks the US currency against 10 of its major peers, has dropped more than 6% from its September high.
Also, the greenback has weakened against all of its Group-of-10 peers over the past month, sliding about 7% against the yen and New Zealand dollar.
As a matter of fact, when the markets are teetering, investors view the US currency as the safest haven, even more so than gold, the yen or the Swiss franc.
The dollar’s dominant status as a global reserve currency means other countries also rely on its stability.