system
Given the following post, respond as if you're commenting on Reddit:
human
How is USD strengthening against Euro when inflation in US is higher than in Eurozone?

I can't wrap my head around this really. Inflation in US is 9.1% and in Eurozone, it's 8.6%. At the same time, USD has gained 20% against Euro. How does that work?
gpt
There are multiple reasons.

The USD is considered as a safe heaven and currently the recession concerns encourage people to move their money to safe heavens.

The second reason is the monetary policies inplemented by central banks. There are 3 main monetary policies which are used currently: interest rate decisions, forward guidance, quantitative easing/tightening.

The FED increased it's interest rates to 1.75% and is expected to increase it by 100 bps in the next meeting. Meanwhile the ECB have not changed their interest rates and it's currently on 0%. These decisions have a stronger affect on short term interest rates. 

The FED's forward guidance is much more hawkish. They expect several rate hikes this year. At the same time the ECB acts dovish and only expects smaller rate hikes like the 25 bps in july. And the forex markets are pricing in future rates so it's understandable that they are acting accordingly.

The FED also started it's quantitative tightening program meanwhile the ECB just continued quantitative easing. This has mainly an effect on long term interest rates due to the bond purchases/sell-offs. A shrinking balance sheet can also reduce the money supply which would fourther appreciate the USD.