Why is the dollar so strong relative to other currencies?

The dollar is strong when it appreciates against other currencies, meaning one dollar buys more of those currencies than before. The Congressional Research Service says its value under floating exchange rates is largely set by supply and demand in foreign-exchange markets.

Long-term demand rests on the United States’ economic scale, its institutions and its financial markets. In shorter periods, relatively higher U.S. interest rates, demand for U.S. assets and investors seeking safety during global stress can push the dollar higher, according to CRS.

How exchange-rate strength works

Exchange rates compare one currency with another. CRS says investors, banks, companies and central banks buy and exchange currencies for trade, investment and other cross-border transactions, and those flows help set the dollar’s exchange rate.

A dollar move against one currency does not describe every exchange rate. CRS says the Federal Reserve’s broad dollar index tracks currencies of major U.S. trading partners, weighted by bilateral trade volume.

Why global demand for dollars persists

Federal Reserve researchers link the dollar’s international role to the size and strength of the U.S. economy, stability, openness to trade and capital flows, property rights, the rule of law, and deep, liquid U.S. financial markets. The Fed also points to a large supply of extremely safe dollar-denominated assets.

The dollar’s use in global trade and finance adds to that demand. USAFacts, citing Congressional Research Service data, reported that about half of international trade and about half of international loans and debt securities were exchanged in dollars in 2022.

Central banks also hold dollars as reserves. Federal Reserve research found that the dollar accounted for 58% of disclosed global official foreign-exchange reserves in 2024, compared with 20% for the euro, 6% for the Japanese yen, 5% for the British pound and 2% for the Chinese renminbi.

What can make the dollar rise faster

CRS identifies relative U.S. interest rates, relative economic conditions and investor demand for U.S. assets as factors behind dollar appreciation in particular periods. When U.S. rates are higher than rates abroad, dollar-denominated assets can become more attractive, leading investors to buy dollars to invest in them.

Global crises can also lead investors toward dollars in a flight to safety. CRS documented that pattern during the global shock in early 2020.

Who benefits from a stronger dollar

A stronger dollar has mixed effects. CRS says it tends to make U.S. exports relatively more expensive for foreign buyers and imports relatively cheaper in the United States, which can tend to widen the trade deficit.

• Cheaper imports can raise U.S. consumers’ purchasing power, according to CRS.
• Businesses that buy imported raw materials and intermediate goods may face lower costs, CRS says.
• Exporters can find it harder to sell abroad when their goods become relatively more expensive in foreign-currency terms.

CRS says a strong dollar is not uniformly good or bad for the overall economy. It can also reduce price pressure through lower import prices, particularly during periods of high inflation.

Frequently asked questions

How do higher U.S. interest rates strengthen the dollar?

CRS says higher U.S. interest rates relative to foreign rates can make U.S. assets more attractive. Investors may need to buy dollars to invest in those assets, increasing demand for the currency and contributing to appreciation.

Why is the dollar the world’s main reserve currency?

Federal Reserve researchers attribute the dollar’s international role to the U.S. economy’s size and strength, institutional features including the rule of law, and deep, liquid financial markets with a large supply of safe dollar assets. The dollar represented 58% of disclosed global official foreign-exchange reserves in 2024.

Is a strong dollar good or bad for U.S. consumers and exporters?

CRS says the effects differ. A stronger dollar tends to make imports cheaper for U.S. buyers while making U.S. exports relatively more expensive for foreign buyers, so it is not uniformly good or bad for the overall economy.

Sources

• Strong Dollar: Implications for U.S. Economy — www.congress.gov
• The International Role of the U.S. Dollar – 2025 Edition — www.federalreserve.gov
• Why is the US dollar so strong? — usafacts.org