Strong dollar, weak stock markets

While the broad US stock index slipped into bear market territory for the first time, i.e., lost more than 20 % of its value compared to the high for the year, the US dollar is benefiting from global uncertainties and the Fed's interest rate steps. One euro is currently worth 1.05 US dollars, compared to around 1.2 US dollars a year ago. What are the reasons for the USD rally and does this have implications for investors?

Volatility in the currency markets has increased, which favours the USD, which is seen as a safe haven. The main reason for the increased volatility is the tighter monetary policy of the US Federal Reserve (FED), which has raised interest rates and is scaling back bond purchases. This has given the USD a boost against the euro.
 
However, the ECB is now also expecting 3-4 interest rate hikes this year. Whether this will strengthen the euro is questionable since the economic forecasts for the euro area have been downgraded. In order to strengthen the euro, apart from a quick intervention by the ECB on interest rates, positive signals for an end to the war in Ukraine are also needed. It is therefore likely that the USD will retain its strength in this environment and that parity, i.e., a EUR/USD exchange rate of 1:1, will be reached.

The US equities in the portfolio benefit from the rise in the US dollar in the form of exchange rate gains, which at least partially mitigate the fallen prices. But that is already the end of the list of positive effects. Oil and gas are often traded in USD, and the appreciation causes prices to rise further. Loans taken out in USD become more expensive. Especially for the emerging markets (EM), this development has a dampening effect. Overall, the strong US dollar is contributing to a worsening of the inflation problem (except for the USA, which is now benefiting from cheaper imports), combined with fears of recession, this currently means a very challenging climate for investors. This environment is expected to remain in place over the next few months.