From CNBC: 2024-07-10 09:00:01

The U.S. Federal Reserve may cut interest rates before year’s end, affecting the strength of the dollar. Rising rates strengthen the dollar, making overseas purchases cheaper, while falling rates weaken the dollar, making purchases more costly. Analysts predict the dollar may weaken next year, but some experts believe its strength may continue.

The Fed aggressively raised interest rates to combat high inflation, leading to the dollar’s strongest level in years. The Nominal Broad U.S. Dollar Index is higher than pre-pandemic levels, impacting exchange rates with major trading partners. A strong dollar gives discounts on purchases abroad, attracting more Americans to countries like Japan with favorable exchange rates.

Interest rate differentials between the U.S. and other nations drive dollar fluctuations. The Fed’s actions, along with those of other central banks like the ECB and Bank of Japan, impact the relative strength of the dollar. A strong U.S. economy also supports a strong dollar by attracting foreign investment and higher returns compared to other regions.

Read more: Why the Fed cutting interest rates may weaken the U.S. dollar