12/08/2025
RATE vs USD
When the inflation rate in the USA changes, it can significantly affect the value of the US dollar (USD) in both domestic and global contexts. Here’s how it typically works:
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1. Higher Inflation → Weaker Currency (usually)
• Reason: When prices rise faster in the US than in other countries, each dollar buys less, reducing purchasing power.
• Foreign Exchange Impact: International investors may view the USD as less attractive if inflation is not matched by higher interest rates, leading to potential selling pressure.
• Example: If inflation is high but the Federal Reserve doesn’t raise rates enough, traders may shift investments into currencies from countries with stronger returns or lower inflation.
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2. Lower Inflation → Stronger Currency (usually)
• Reason: A stable inflation rate maintains purchasing power and encourages foreign investment.
• Foreign Exchange Impact: If the US inflation is lower than global averages, investors see USD assets as safer, strengthening the currency.
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3. The Role of the Federal Reserve (Key Factor)
• If inflation is high, the Fed may raise interest rates to control it.
• Short-term effect: Higher interest rates often make the USD stronger because investors seek higher yields.
• Long-term risk: If rates stay too high for too long, it could slow the economy and eventually weaken the dollar.
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4. Global Trade Impact
• High US inflation makes American goods more expensive abroad, which could reduce exports and demand for USD.
• Low inflation helps keep US goods competitive internationally.
