Opinion | Wonking Out: The Mysteries of the Almighty Dollar

Put it this way: You might think — or anyway, I might think — that when the dollar rises against the euro, the price of, say, oil would fall in dollars but rise in euros. But that’s not what they find; confirming a result I’ve seen many times, they find that “a one percent appreciation of the dollar is associated with a much larger percent fall in average global commodity prices.” When the dollar rises against the euro, the price of oil doesn’t just fall in dollars; it falls in euros, too.

So the rising dollar helps explain why world oil prices are actually about the same now as they were before Russia invaded Ukraine, and why even the price of wheat has given up much, although not all, of its Putin-induced spike. And these effects of the rising dollar are one reason America is, for the time being at least, experiencing a sort of inflation holiday.

But why is the dollar up so much? At first sight, the answer seems obvious: It’s all about the Fed. The Federal Reserve has been raising interest rates to bring inflation down, which, other things being equal, makes buying dollar assets more attractive and raises the dollar’s value.

But the Fed isn’t the only central bank hiking rates. International economists normally believe that exchange rates are driven by long-term, not short-term, rates — and long-term rates depend not just on what a central bank has already done but on what investors expect it to do in the future.

So here’s the funny thing: Long-term rates have risen as much in Europe as they have in the United States. In December 2021, the interest rate on U.S. 10-year bonds was 1.47 percent; the corresponding rate in Germany was minus 0.38 percent, reflecting investors’ belief that the European economy faces many years of weak growth. As of this morning, the U.S. rate was 3.26 percent, up 1.79 points since December; the German rate was 1.67 percent, up 2.05 points over the same period. So Europe seems to have had as much or more effective monetary tightening as America. Why, then, has the euro plunged?

It’s not hard to come up with possible reasons, especially the fact that Vladimir Putin’s de facto gas embargo is hitting Europe hard. But in any case, dollar strength seems to be about more than the Fed’s fight against inflation.

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