Rising Interest Rates: The US Federal Reserve has been raising interest rates to combat high inflation. This has made it more attractive for investors to hold US dollar-denominated assets to earn higher returns. Higher interest rates increase the demand for the dollar, leading to its appreciation.
Safe-Haven Status: In times of global economic uncertainty, the US dollar is perceived as a safe-haven currency. During market volatility or geopolitical crises, investors seek refuge in the stability and liquidity of the US dollar, driving up its value.
Strong Economic Growth: The US economy has been showing robust growth compared to other major economies. This economic strength gives confidence to investors and attracts foreign capital into the US, further supporting the dollar's appreciation.
Trade Balance: The US has been experiencing a narrowing trade deficit, improving its trade balance. A more balanced trade position reduces the supply of US dollars in the global market, contributing to the dollar's strength.
Quantitative Tightening: The Federal Reserve has been engaged in quantitative tightening (QT), reversing its previous quantitative easing policies. QT involves reducing the central bank's balance sheet and reducing the supply of money in the economy. This scarcity effect can boost the value of the US dollar.
Geopolitical Developments: Global events such as international conflicts or political instability can drive investors towards safe-haven assets, including the US dollar, resulting in its appreciation.
Dollar's Reserve Currency Status: The US dollar's status as the world's primary reserve currency adds to its demand. Many international transactions, commodities, and financial assets are denominated in US dollars, creating a constant global demand for the currency.
While these factors have contributed to the appreciation of the US dollar, it's important to note that currency movements can be complex, and the value of the dollar can also be influenced by other factors such as international trade policies, market sentiment, and macroeconomic indicators.