Euro Drops Below $1.00; Pound Drops Below $1.1800

Obviously, something major is going on in the world.

The value of the dollar is getting stronger and stronger while the Euro and the British pound get weaker.

Overall, the value of the U.S. dollar is going up.

Here we see the U.S. Dollar Index (DXY) reaching 108.42 on Monday morning, right near the high for the year.

So, the value of the U.S. dollar has been rising all year.

But, the value of the U.S. dollar has been getting stronger since early January 2021. The rising value of the dollar in 2021 seemed to be associated with the Biden administration coming into office.

The rise since January 2022 is closely connected with the Federal Reserve’s move to tighten up on monetary policy in order to combat inflation.

But, there has been a lot going on surrounding the battle to fight inflation.

Monetary Policy

The Federal Reserve has been fighting inflation this year, and the battle really began in March 2022 when the FOMC raised the Fed’s policy rate on interest.

The policy rate was raised again in May and June and July.

The Fed has also started to reduce the size of its securities portfolio. Since the banking week ending June 22, the Fed has overseen a reduction in its securities portfolio of $65.5 billion. And, this is only the start.

The important thing about this move is that the Fed began its inflation fight before other central banks worldwide started their fight.

And, it needs to be said that inflation is now an international problem. It is not just limited to the United States. In fact, inflation is worse in many other countries.

Yet, the Federal Reserve seems to be one of the leaders in the effort to control price inflation.

As a consequence, this disassociation of central bank policies is one of the major reasons why the U.S. dollar is getting stronger while the currencies of other major geographic areas are getting weaker.

For example, the Bank of England and the European Central Bank have significantly lagged the Federal Reserve. And, this has contributed to other major problems currently taking place.

But, the exchange rate getting the most attention, the Euro/Dollar, has seen the decline in the value of the Euro relative to the Dollar bringing the exchange rate back around parity.

The decline in the value of the British Pound relative to the U.S. Dollar has not been far behind.

Here is the Pound/Dollar chart.

So, it appears as if most central banks around the world are, in reality, out-of-sync with one another. As a consequence, foreign exchange rates are also out-of-sync with one another.

World Disequilibrium

I have been writing a lot about the economic disequilibrium that exists within the United States and why it is important to understand this situation so that we can achieve some understanding of what policymakers and investors face as we move forward in time.

Adding on to this is the fact that the world is in disequilibrium as well, and the future adjustment of the global economy is not going to be one of peace and tranquility.

Through the 2010s, the world was in a relatively stable position and moving forward into the new “information” era. There were dislocations here and there, but generally, things were moving forward.

And, then the Covid-19 pandemic hit the world!

The world responded, each nation acting in its own way. And, the reaction was quite extensive. That is, leaders, generally, wanted to err on the side of being too generous in their response, rather than taking the responsibility of not doing enough to combat the threat of a major collapse of markets and economies.

This resulted in inflation becoming a global event, resulting from many different distortions like, for example, in supply chain operations, high energy prices, and high food prices.

Adding to this has been the Russian battle with Ukraine along with problems rising in the Far East and other geographic areas around the world.

In a word, the world is in a “mess” right now, with almost everyone creating their own path to recovery, but with each effort seemingly resulting in a further disjointed world.

Dollar Concern

What I have just described is the general jumble the world is in. What I am interested in, however, is what is going to happen to the value of the U.S. dollar.

The U.S. dollar is strong right now, almost a real surprise.

The United States economy is in a strong position right now, internationally.

In my opinion, the strong dollar is a result of the transition that is taking place in the global economy.

That is, the world is changing because of the new technology that is taking over the structure and operation of the firms, sectors, industries, economies, and nations.

Classical economics presents a solution to a country that creates a strong currency and wants to lead the rest of the world with its highly productive manufacturing industries.

That is not our situation now. Things are not going to work out this time around based upon the lead nation of the world maintaining its position through being more productive than other countries.

Right now, we are moving into another era, and the solutions that will be worked out are a part of the radical uncertainty that now exists globally.

The United States with the strong U.S. dollar is, right now, in the place to lead the world to this next era.

The world is going to be re-aligned. A lot of changes are going to take place over the next few years. The past and past theories are not going to be sufficient to get us into this new world.

But, at this time, for whatever reason, the United States, with the strong dollar, is positioned to play the central role in what takes place.

Whether or not the United States plays this leadership role is the real question.