What’s behind the rising value of the U.S. dollar?

There’s been a significant run-up in U.S. dollar since the end of September. Last week, the DXY index — which tracks the value of the dollar against other major currencies — rose more than 2%. That’s the most in two years. 

It’s partly a move to so-called “safe-haven” currencies, which include the Swiss franc and Japanese yen, in a time of rising geopolitical tensions. And it also reflects the likely course of Federal Reserve interest rate cuts. 

All throughout the summer, the U.S. dollar has weakened against other major currencies in anticipation of Fed rate cuts that would make dollar-denominated assets less attractive to investors. But then, over the last two weeks, the dollar surged back again.

“Why’s the dollar strengthening? It had been softening,” said Quincy Krosby, chief global strategist at LPL Financial.

She explained that the Fed’s first rate cut was big — 50 basis points, to ensure against a recession or spike in unemployment.

But then, the September jobs report was blockbuster. So, “the market has been recalibrating, and saying, ‘The Fed isn’t going to go and cut rates as big as they did,'” she said. “And that provided an underpinning for the dollar” — while also affirming that the U.S. economy is still relatively strong. 

Meanwhile, “much of the rest of the world is in slightly worse shape, especially in Europe,” said Eswar Prasad, a senior professor of trade policy at Cornell. “Hotspots like the Middle East are getting even hotter.”

The greenback would likely rise more if the conflict between Israel and Iran leads to a disruption of global oil supplies, according to Jonas Goltermann, deputy chief markets economist at Capital Economics. 

For now, however, the dollar’s only appreciated moderately. “It’s a world everyone can live with. It’s not too strong and it’s not too weak,” he said. “It’s a bit of a help for the rest of the world.”

And that’s making global exports cheaper for U.S. consumers.