Why is the US dollar so strong?
The dollar’s value comes from the US’ position as a critical global economic power and the country’s political and economic stability.
While it may hold less value than such currencies as the Swiss franc or the British pound, the dollar’s global use makes it a more commercially viable currency.
Plus, economic or political disturbances can cause a currency’s value to change suddenly. Venezuela is a recent example: financial trouble and political instability have led the value of its domestic currency, the Bolivar, to drop from 10.4 Bolivars per USD in 2017 to 236,266.5 Bolivars per USD in 2020.
In contrast, due to its diverse economy and strong political institutions, the US can survive periods of poor economic growth, such as a recession. This makes the country an ideal place for financial investment and trade, further strengthening the demand for the USD.
Another key factor to the dollar’s relative strength is the Federal Reserve, which sets interest rates to avoid high inflation and maintain economic stability. Keeping inflation rates low (the Fed aims for a long-run annual rate of 2%) prevents the dollar from losing too much value over time.
The global role of the US dollar
The prevalence of the USD in every major economy means most nations use the currency to buy and sell goods worldwide.
For example, if South Korea exports goods to Brazil, the two countries might simplify the transaction by using USD rather than their respective currencies.
In 2022, about half of international trade was exchanged in US dollars, as were about half of all international loans and debt securities, according to the Congressional Research Service.
