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Friday, December 02, 2022

Dollar hits 2-decade high as investors seek refuge

NEW YORK ( Associated Press) – The value of the US dollar rose in April as investors sought refuge amid an aggressive move by the Federal Reserve to fight rising inflation.

Rising inflation, which has caused the biggest jump in prices in 40 years, has prompted the Federal Reserve to aggressively raise interest rates, increasing demand for the US dollar. The US dollar is also the world’s reserve currency and is considered a safe haven in times of global economic stress.

The US Dollar Index, which tracks the value of the dollar against the euro, the Japanese yen and other major currencies, is at its highest level in two decades. Mark Heifel, chief investment officer at UBS Global Wealth Management, said in a note to investors, the greenback will remain strong against almost all currencies during the quarter.

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Dollar gains come as investors withdraw from technology stocks due to rising inflation concerns. The euro lost value relative to the US dollar as Russia’s invasion of Ukraine raised fears that rising energy costs would worsen economic growth in the 19-country eurozone. Europe is heavily dependent on Russia for natural gas. The conflict has also made staple food items such as wheat and maize more expensive.

China’s strict COVID-19 lockdowns in Shanghai and Beijing are also reviving fears that the virus pandemic still threatens the global economy. The International Monetary Fund cut its growth forecast for China’s economy due to the impact on commerce from the lockdown.

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The strengthening of the dollar has affected the earnings of the companies. About 40% of revenue from S&P 500 companies comes from outside the US, where a stronger dollar has cut into profits. Drug developer Biogen said part of the decline in its revenue outside the US was due to the currency effect of a stronger US dollar.

Traditional safe havens have been behind the recent surge in the value of the US dollar, but a slowing US economy is likely to reverse that this year.

“The direction of the dollar, as always, is very difficult to forecast in the short term. However, in the long run, these economic forces should prevail, pushing the greenback down,” said David Kelly, chief global strategist at JPMorgan Funds.

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