Dollar’s value climbs amid high interest rates, thriving U.S. economy

The U.S. dollar has been on something of a tear recently. Compared to our trade partners on average, its value has gone up 4% so far this year. Compared to the Japanese yen, the greenback has strengthened by almost 16% in 2024, and Japan and South Korea aren’t happy about the currency gap.

The dollar is strong because more people want dollars, and just like everything from Taylor Swift tickets to toilet paper, more demand means more expensive. 

“Yes, we see continued demand for dollars,” said Win Thin, global head of markets strategy at Brown Brothers Harriman. Marketplace caught up with him by phone on the trading floor where he executes transactions for mutual funds, pension funds and endowments around the world. 

They want dollars. Partly because dollars let them buy U.S. stocks.

“The U.S. has strong growth, strong earnings potential, and so we’re drawing in global equity investment,” Thin said.

Then there’s U.S. interest rates. They’re relatively high, and they can make money for fixed-income investors.

“The Fed has one of the highest policy rates in the developed world, and other central banks are starting to move towards cutting rates,” said Erik Nelson, a macro strategist at Wells Fargo.

U.S. interest rates aren’t high by accident. The Federal Reserve is keeping them up because month after month, inflation data has been coming in too hot. Investors saw that and realized rates would stay higher for longer. 

“The key moment for us was when we got the third consecutive month of hotter-than-expected inflation readings, and that really changed the way we looked at the dollar,” said Alan Robinson, a senior vice president at the Royal Bank of Canada.

The dollar has risen so sharply, it’s become a problem for South Korea and Japan. 

“Things have gotten so extreme that Japan is importing inflation now because their currency is weak,” said Brian Rose, senior U.S. economist at UBS.

“Importing inflation” because things paid for in dollars, like oil, become more expensive. Eventually, a country might have to raise its own interest rates to compete for global money flows — even if that’s not good for its economy. 

“Sometimes you have to raise rates even though you don’t really want to,” Rose said.

But money goes where money grows. And right now, that’s the U.S.