The Dollar Soars to a Two-Year High: The 'King Dollar' Effect and Its Global Impact

US Dollar Rises Amid High Bond Yields, Fueling Continued Strength in the Global Currency Market

The US dollar has surged to its highest point in over two years, driven by escalating US bond yields and the economic policies under President Donald Trump. The "King Dollar" phenomenon is expected to persist as the Trump administration's tariff policies continue to support the greenback's dominance in the global economy.

According to reports from Bloomberg and Reuters, the Dollar Index, which measures the value of the US dollar against six major currencies, has been on an upward trajectory. On January 13, the index reached a peak of 110.176, a level not seen since November 2022. The index has since hovered between 107 and 109, reflecting a continued strengthening of the dollar. When the index surpasses the 100 mark, it indicates that the dollar is stronger than other currencies, and the recent rise is further evidence of the dollar’s growing power in the global market.

This surge in the value of the dollar has contributed to a weakening of other major currencies. The euro, for example, fell more than 2% on February 3, dropping to 1.0141 USD, its lowest level since November 2022. This decline is attributed to a combination of economic slowdown within the Eurozone and the European Central Bank's (ECB) indication of further interest rate cuts. Additionally, President Trump's signal of potential tariffs on European Union (EU) goods has heightened fears that the euro could fall below the parity threshold of 1 EUR = 1 USD, which would mark a significant milestone in the ongoing US-Europe economic tension.

Similarly, the Japanese yen has fallen to its lowest point in 34 years against the US dollar, despite Japan's exit from its negative interest rate policy in March of last year. The Chinese yuan has also experienced a downward trend relative to the dollar. Meanwhile, South Korea’s won has lost value, with a 5.3% drop in December, making it the second-largest decline among 20 major global currencies, just behind the Russian ruble, which fell by 6.4%.

The strong dollar trend is expected to persist in the coming months. Scott Bensent, US Treasury Secretary, recently reaffirmed in an interview with Bloomberg that the strong dollar policy aligns with President Trump's economic goals. "We want the dollar to remain strong," Bensent stated. Typically, when a currency strengthens, it can reduce the price competitiveness of exports from the country using that currency, leading many countries to prefer a weaker currency. However, the Trump administration’s focus on maintaining a strong dollar is seen as a strategy to support its ongoing tariff policies. With a stronger dollar, the impact of tariffs on imported goods remains muted, helping to keep inflationary pressures in check.

While a strong dollar could reduce the competitiveness of American exports, the administration's focus appears to be on utilizing tariffs as a tool to address the US trade deficit. By maintaining a robust dollar, the US can impose tariffs without significantly increasing import costs, while simultaneously striving to reduce its trade imbalance through the strategic use of trade barriers.

In summary, the rise of the US dollar is not a fleeting trend but is closely tied to the current administration's economic and trade policies, particularly in regard to tariffs. As global currencies continue to struggle, the strength of the dollar remains a critical factor shaping the international financial landscape. The "King Dollar" effect, propelled by high bond yields and trade strategies, is likely to dominate the global economy for the foreseeable future, with far-reaching consequences for global trade and currency markets.