The mighty US dollar flexed some muscle last week in a positive sign for Americans' purchasing power.
The US dollar index, which measures the currency's strength against six of its peers, closed Tuesday at 106.26, its highest level since early November. The US economy's remarkable strength is a big reason behind the dollar's rally over the past week.
The latest data on retail spending released Tuesday showed that Americans continue to open up their wallets, and other figures released earlier this month show the US job market remains solid and the country's manufacturing sector is expanding.
Federal Reserve officials have said that the economy's resilience means they can hold rates steady at a 23-year high as they wait for more evidence that inflation is headed toward their 2% target. The central bank cuts rates if it's clear that the economy is contracting, since it's also responsible for maximizing employment in addition to stabilizing prices.
But there are signs that inflation's cooling has stalled. March was the third straight month of hotter-than-expected inflation readings. Inflation overall has recently been pushed up by climbing gas prices and stubbornly elevated housing costs.
Fed Governor Michelle Bowman suggested in a speech Wednesday that the central bank may need to hike rates again or push the first rate cut further out since there "is a lot of financial market activity and a lot of continued growth that we wouldn't have expected if policy was sufficiently tight."
But the robustness of America's economy isn't the only thing lifting the US dollar.
Before the Bell spoke with Claudio Irigoyen, head of global economics at Bank of America, about the dollar's rally and what it means for Americans and the world.
(This interview has been edited for length and clarity.)
What's powering the dollar's rally in addition to the US economy's resilience?
Claudio Irigoyen: The dollar is strengthening for a combination of reasons. It's not only the Fed saying that it is not going to cut rates soon, which has caused markets to reprice. It's also that the US economy is doing better than the rest of the main regional blocs, including the euro zone. Most of the surprises in growth keep coming from the US.
It is also because every time you have a shock on the geopolitical side, there is this flight to quality components, which helps the dollar. And if you keep having incidents in the Middle East, those shocks will cause a spike in energy prices and those shocks have a proportionally bigger effect on Europe and Japan, but not as much on the US, which is more energy independent.
What does a strong US dollar mean for Americans?
For Americans, the purchasing power of the dollar is higher and consumption will remain strong. People will travel abroad more, probably. Imports are cheaper, so they will import more. But obviously if that happens, then the rest of the world is happily financing the country's current account deficit. (A "current account" is a record of a country's transactions with the rest of the world, including imports, exports, payments and other transfers. And a deficit occurs when spending exceeds production, resulting in net imports.)
What does the dollar rally mean internationally?
It's not necessarily bad for other economies because if you have a weaker currency, that should help your exports, and that's the way the global economy re-balances. However, the strong dollar is not an exogenous shock, it is an endogenous reaction of the market to the fact that the US is doing better than the rest.
I don't think you're going to have a weakening of the dollar until you have more convergence in growth or in monetary policy. There's a very narrow path where the dollar can weaken, and that happens usually when China, relative to trend, is doing better than the US. Despite the better-than-expected numbers in the first quarter in China, we are still not seeing that. And again, geopolitical risks need to disappear from the map, but everything indicates that between now and the US elections, geopolitical risks will remain.
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