The dollar's recent rally poses a threat to the tricky task of other central banks around the world of reducing inflation while protecting fragile economic growth.
The dollar hit its highest level of the year on Monday, extending its gains since mid-July to 6.6 per cent. The WSJ dollar index closed last week with its biggest quarterly gain since last fall; Last fall, the dollar enjoyed a once-in-decades rally. Some emerging market currencies have been particularly hard hit, with the dollar up 11% against the Chilean peso and nearly 8% against the Hungarian forint.
The dollar's strength was driven by a surge in Treasury yields. The 10-year yield hit a 16-year high of 4.682% on Monday. Investors are increasingly confident in the resilience of the US economy, but also that the Fed is likely to keep interest rates higher for longer than the typical business cycle.
Any big movement in exchange rates creates winners and losers. In the US, a strong dollar is politically popular and generally good for consumers, as it keeps inflation in check by holding down import prices and reduces the cost of foreign travel.

But for the rest of the world, the return of a strong dollar is largely unwelcome. In many countries, interest rates are at their highest levels in years or decades, which has led to rising risks of financial stress. The combination of rising interest rates, a stronger dollar and stubbornly high oil prices means slower global growth and more financial fragility.
U.S. companies with large overseas operations, such as Apple Inc. (AAPL), also take a hit because their overseas revenues fall in dollar terms and a stronger dollar makes their goods more expensive when translated into foreign currencies.
"The dollar has been strong for too long. It's starting to become an issue again, "said Chris Turner, head of currency strategy at ING.
The dollar remains the most widely used currency in global trade and finance by a wide margin, meaning its movements can have far-reaching effects outside the United States. Commodities such as oil and wheat are typically priced in dollars. Governments, companies and households around the world have trillions of dollars of debt in dollars. When the dollar rises, it becomes more expensive for other economies to import or service their debts.
Maurice Obstfeld, former chief economist of the International Monetary Fund, said markets have tried relentlessly to envision the rosy outlook associated with a weaker dollar, but they keep getting disappointed that the reality is not so rosy.
He said a strong dollar would be bad for emerging markets and bad for global trade.

So far, at least, the fallout has been less widespread than last year, when a surging dollar triggered a historic sell-off in emerging market assets that plunged countries such as Sri Lanka and Ghana into full-blown economic crisis.
Latin American and eastern European currencies have been hit hard in recent months. Central banks in Brazil, Poland and Hungary, which won praise for rapidly tightening monetary policy in 2021, have started to cut policy rates, well ahead of the Fed and other developed market central banks. Those central banks are now under pressure to pause or slow their rate cuts to prevent further pressure on their currencies.
Emerging markets are feeling the brunt of the dollar's strength across the board. Mr Obstfeld co-authored a paper last year showing how the shock of a sharply rising dollar contributed to years of underperformance in less developed economies. Consumption, output, investment and government spending in these economies are under pressure along with their currencies.
"It's a double whammy," he said. "Not only have we been forced to deviate from the growth target, but the inflation target has also drifted away."
Some central banks are using foreign exchange reserves to prop up their currencies. Other central banks have openly threatened to do so, a tactic known as verbal intervention.
Japanese Finance Minister Shunichi Suzuki on Friday pledged to take action against the yen's sharp decline, which is now trading near 150 yen to the dollar. Last year, the Bank of Japan intervened around that level to buy yen for the first time in 24 years.
"We will take appropriate action against excessive exchange rate volatility and do not rule out any options," Mr Suzuki said. "We have a strong sense of urgency."
Switzerland and South Korea have both sold reserves to support the Swiss franc and the won. Analysts believe China is getting state banks to sell dollars to support the yuan, which fell to a 16-year low in September.
Investors had widely expected the dollar to weaken this year as the Fed winds down its most aggressive campaign of rate hikes since the 1980s. Currencies that were beaten down in the first half of this year, such as the pound and the euro, did rebound from their steep declines in 2022.


But those rallies have since fizzled out. With the eurozone economy stalling and renewed concerns about the debt sustainability of vulnerable southern economies such as Italy, the euro has fallen back towards $1.05, having risen above $1.10 over the summer.
Many investors are still hopeful that the dollar's decade-long rally, which has left it at least 10 percent overvalued by many estimates, is coming to an end.
One factor contributing to the dollar's weakness could be slowing U.S. economic growth. U.S. consumers are burning through more than $2 trillion in savings from the pandemic, and the resumption of student loan payments is expected to further dent spending. The US unemployment rate, while still near record lows, has edged up.
Luca Paolini, chief strategist at Pictet Asset Management, said U.S. growth is likely to follow other economies down in 2024. He said the dollar's recent rise was "a last hurrah before a big fall next year".