Why Has the Dollar Been So Strong?

Tim Strauts: In today's chart, we're going to look at the Trade-Weighted Dollar Index, which is an index that looks at a basket of international currencies weighted by the amount of trade they do with the U.S. The two biggest trading partners the U.S. has are China at around 21% and the Euro Area at around 16%.

Since mid-2011, the U.S. dollar has appreciated almost 13%. There are two main reasons that the dollar has been so strong. First, the U.S. has been on a quantitative easing program, where the Federal Reserve has been purchasing Treasury securities on the open market to keep our interest rates low. In October, the Federal Reserve is stopping the quantitative easing program. This news has been announced for several months. So, we have seen the Trade-Weighted Dollar Index has actually been accelerating higher over just the last two months.

The second reason is that an increase in U.S. exports has also helped to strengthen the dollar. The impact of a strong U.S. dollar for U.S. companies with extensive international operations will mainly be to lower earnings in the quarters ahead. Also, a strong dollar keeps inflation low, which should keep interest rates low. And finally, if you travel overseas, your dollar will become more valuable.