Year-to-date the nominal dollar index has risen by 15.2%; from the recent low in January 2021 to the end of August 2022, it increased by 18.4% in real trade-weighted (advanced currencies) terms; and since the low of 2011—the start of the current dollar bull market—the currency (also in inflation-adjusted terms) has increased by 53%, almost matching the 1980s bull market of 58% (see chart 1 in the report). Such strength has come in the face of an ongoing “death of the dollar” narrative that has been circulating for years now, built on the back of the emergence of cryptocurrencies and a belief in the end of U.S. hegemony, as well as growth of China and the EU and the view that the yuan and euro will soon be alternative reserve currencies.

The most recent development, which many felt would be the final nail in the coffin, was the West’s freezing of Russia’s sovereign foreign-exchange reserves as the war broke out. Some believe this will cause many countries to seek a more reliable reserve currency partner. Certainly, use of the dollar as the world’s reserve currency will not last forever and nor will the current dollar bull market, though we may not be quite at the end of either just yet.

In this Economics Weekly, we argue that while the dollar’s recent strength is in many ways helpful for the U.S. economy in fighting inflation, given the importance of the dollar for the global economy, such dramatic appreciation is also akin to a shifting of the tectonic plates of global finance—and cracks are starting to appear.

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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.