The dollar's rapid appreciation has central banks around the world engaging in a reverse currency war as they battle to keep pace with the Fed.
Over the summer, inflation hit more than 40-year highs, prompting the Fed to raise interest rates. The greenback is at least 7% higher against the G-10) in the year 2022. The British pound is off a record low, but it's still up more than 20% against the Japanese currency.
The strong dollar has caused a scramble as global central banks look to strengthen their currency and fight inflation. Last week, as the Fed hiked rates for a fifth time this year, a number of other central banks raised their benchmark.
Rate hikes by central banks have also been used to backstop the currency. For the first time in 24 years, the Bank of Japan decided to intervene in the foreign exchange market to weaken the Japanese currency.
The decisions put a different spin on the currency war. Policymakers are trying to engineer gains rather than debasing their currency. If central banks don't keep pace with Fed tightening, their currencies will weaken against the dollar and make the fight against inflation more difficult.
Craig Erlam of Oanda said that the dollar is being heavily backed in currency markets at a time of economic uncertainty.
There are some strategists who are skeptical of the efforts that have been made so far.
George Saravelos, an analyst withDeutsche Bank, said Friday that he was not sure if this would work in turning the trend of the Japanese currency. The bottom line is that the global dollar positive environment needs to change in order for the Japanese currency to strengthen.
After raising interest rates 50 basis points last week, the Bank of England said it would hike more aggressively in November.
The pound plummeted to an all-time low against the dollar after the UK government's tax-cutting proposals spooked markets.
While the UK central bank won't blindly prop up the pound, its partial intervention shows it is concerned about the impact sterling's depreciation will have on soaring prices. The UK imports most of its food and fuel from abroad, and the pound's slide will make those goods more expensive.
SEB strategist Jussi Hiljanen said that the bank said that it would not hesitate to raise interest rates. The messages may appear to be conflicting, but they should be seen as the bank's commitment to not strengthen the pound.
The UK and Japan are both trying to keep up with the Fed.
The People's Bank of China and the Riksbank hiked their rates last week.
The Swiss National Bank lifted its policy rate by 75 basis points in order to get the economy going again.
Chris Turner, ING's global head of markets, told Insider that there was no concern about inflation between 2008 and this year.
He said that the concern is inflation. Most countries can't keep up with the dollar.
The pound fell to a new low against the dollar. Food and gas prices could go up.
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