One of the consequences of the military conflict in Ukraine has been the movement of money into ‘safe-haven’ investments such as gold, silver and platinum. The price of gold, for example, has risen to an 18-month high at $1,943 an ounce. Investors often look to put their money into precious metals during times of international conflict because people are attracted by the intrinsic value of commodities such as gold and silver.  

In a similar way, the US Dollar is often seen as a ‘safe-haven’ currency by investors and international money flows have moved into the US Dollar as the Ukraine conflict has developed. The US Dollar is the most widely traded currency in the world and the financial assets of the world’s biggest economy are attractive as a safe investment.

The Dollar is currently trading at a one year high against the US Dollar Index which is a measure of the value of the US Dollar relative to the value of a basket of currencies of America's major trading partners. The US Dollar has risen significantly against most major currencies in the last year. Against the Euro, for example, the US Dollar was trading at €0.82c to $1 and it is currently trading €0.90c to $1 an appreciation of nearly 10 per cent.

The increase in the value of the Dollar in most recent days is partly due to its ‘safe-haven’ status, but this does not account for the strength of the dollar over the last 12 months. One reason for the appreciation of the dollar over the last year is the interest rate outlook of the US central bank.  The Federal Reserve is looking to start to increase its base interest rate as part of its monetary policy to tackle the US inflation rate which has reached 7.5 per cent which is the highest level for a generation. The potential for rising interest rates in the US attracts investment funds looking for higher returns along with speculative ‘hot money’ flows into the US which increases the demand for the US Dollar leading to an appreciation in the US Dollar exchange rate.

The US economy has also rebounded strongly from the recession caused by the Covid19 pandemic and the growth rate of 7 per cent in the final quarter of 2021 increases sentiment towards the US economy from investors and this also increases the demand for the US Dollar.

The appreciation of the value of the US Dollar will be useful in the fight against inflation in the US as a stronger currency will reduce import prices and costs to businesses who import inputs from overseas. It will, however, make export markets for US exporters more challenging as the price of US goods sold aboard become more expensive.

Possible points for discussion with a class

How important are interest rates in influencing the value of a currency?

Who wins and who loses when the value of the US Dollar rises?

Is it ethical for investors to profit from investments that are affected by an international conflict?