Take the US dollar for example. I was reading an article which said the dollar reached new highs recently, but there was a negative connotation to the piece. Doesn’t something “rising” generally mean it’s “stronger”? I usually think in terms of assets like stocks
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This is a topic that is way beyond ELI5. But the most basic jist of it is:
– It causes many disruptions and distortions to global trade.
– It disrupts government treasury markets.
– Causes inflationary pressure to other nations.
– Causes global dollar shortages, which because most trade and debts are settled in dollars, makes it hard to trade, or make payments on debts. This can lead to a global economic slowdown, or foreign companies or governments defaulting on debts.
– It forces other nations to raise their interest rates, which slows economic activity.
– It forces other nations to sell their US treasury reserves to get dollars, which then causes our interest rates to rise, and hurts our governments ability to raise capital, and makes our countries debt problem worse.
– If dollar demand is high, then all other assets lose value, including gold, stocks, real estate…etc.
The list goes on. But it should also be noted that it isn’t just the strength of the dollar, but also how rapidly it is gaining strength. Ideally, we want currencies to be and flow gradually. Rapid and large movements of the dollar, either up or down, cause problems.
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