What’s driving the growth and what does it mean for Americans? (Analysis)

(CNN) — The mighty US dollar strengthened last week, which is a positive sign for Americans’ purchasing power.

The US dollar index, which measures a currency’s strength against its six peers, closed at 106.26 on Tuesday, its highest level since early November. The remarkable strength of the US economy is one of the main reasons for the dollar’s rally last week.

The latest retail spending data released Tuesday showed Americans are continuing to open their wallets, and other data released earlier this month showed the U.S. labor market remains strong and the country’s manufacturing sector is expanding.

Federal Reserve officials said the strength of the economy allows them to keep rates at their highest level in 23 years, awaiting more evidence that inflation is moving closer to its 2% target. The central bank cuts rates if it is clear that the economy is contracting, as it is also responsible for maximizing employment in addition to stabilizing prices.

However, there are signs that the cooling of inflation has stalled. March was the third month in a row when inflation exceeded forecasts. Overall inflation has recently been exacerbated by rising gasoline prices and persistently rising housing costs.

Federal Reserve Governor Michelle Bowman suggested in a speech Wednesday that the central bank may have to raise rates again or delay its first rate cut further because “there is a lot of activity and significant ongoing growth in financial markets that we would not like to see happen.” ” expected if the policy were sufficiently restrictive.”

But the strength of the US economy is not the only thing that has lifted the dollar.

Before the call spoke with Claudio Yrigoyen, head of global economics at Bank of America, about the rise of the dollar and what it means for Americans and the world.

This interview has been edited for clarity.

What’s driving the dollar higher, besides the strength of the US economy?

Claudio Yrigoyen: The dollar is strengthening for a number of reasons. It’s not just that the Federal Reserve said it won’t be cutting rates anytime soon, causing markets to rally. It’s also because the US economy is doing better than the rest of the major regional blocs, including the eurozone. Most economic growth surprises continue to come from the United States.

Also because every time there is a geopolitical shock, there is a flight towards quality components, which helps the dollar. And if incidents continue to occur in the Middle East, these shocks will cause energy prices to soar, and these shocks will have a proportionally larger effect in Europe and Japan, but not as much in the more energy-independent United States.

What does a strong dollar mean for Americans?

For Americans, the purchasing power of the dollar is higher and consumption will remain high. People are likely to travel abroad more. Imports are cheaper, so they will import more. But it is clear that if this happens, the rest of the world will happily finance the country’s current account deficit. (A “current account” is a record of a country’s transactions with the rest of the world, including imports, exports, payments, and other transfers. A deficit occurs when spending exceeds production, resulting in net imports.)

What does a rising dollar mean internationally?

This is not necessarily a bad thing for other economies because if you have a weaker currency it should help your exports and that is how you balance the global economy. However, dollar strength is not an exogenous shock, but rather an endogenous market reaction to the fact that the United States is doing better than the rest of the world.

I don’t think there will be a weakening dollar until there is more convergence in economic growth or monetary policy. There is a very narrow range in which the dollar can weaken, and this usually happens when China is doing better than the United States relative to the trend. Despite better-than-expected first-quarter results in China, we’re not seeing that yet. Once again, geopolitical risks should disappear from the world map, but all indications are that between now and the US elections, geopolitical risks will remain.