How can the dollar be worth more relative to the Euro and some other currencies, but inflation (where the dollar is worth less for the American Consumer) still be happening at such high rates consecutively?

Question

How can the dollar be worth more relative to the Euro and some other currencies, but inflation (where the dollar is worth less for the American Consumer) still be happening at such high rates consecutively?

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Answer 1

Because inflation and exchange rates are not straightforwardly related like that.

Let’s just say the price of oil skyrockets. This will cause differing levels of inflation everywhere but, all else equal, not really impact exchange rates.

Let’s say the EU creates the hottest new product ever and Americans are buying it all the time. This will impact exchange rates (the dollar will depreciate against the euro because Americans are buying euros to buy the thing). However, it will likely have no impact on inflation in either place.

The primary connective tissue between inflation and exchange rates is monetary policy. The US Fed has cut the money supply in the US to combat inflation. The ECB has been much, much slower to act. This has meant the dollar has appreciated against the Euro. However, the underlying supply constraints causing inflation are still there and inflation remains high in both areas.