People around the world share almost the same complaint that a rising US dollar is weakening their local currencies, contributing to higher prices for everyday goods and services, exacerbating financial hardship at a time. which families are facing a food and energy crisis linked to the Russian invasion of Ukraine.
According to Eswar Prasad, a professor of trade policy at Cornell University, a strong dollar is worsening conditions for the rest of the world and many economists fear that a strong appreciation of the dollar increases the possibility of a global recession in the next year.
The dollar was up 18% this year, and according to the ICE US Dollar Index – which measures the dollar against a basket of major currencies – last month the dollar hit its highest level in 20 years.
Note that the reasons for the dollar’s rise are not mysterious, with the aim of fighting high inflation in the US, the Federal Reserve has raised the benchmark short-term interest rate five times this year and the council indicates the possibility of more rises, and this has led to higher interest rates on a wide range of US government and corporate bonds, attracting investors and increasing the value of the US currency.
When compared, we find that most other currencies are much weaker, especially the currencies of poor countries: the Indian rupee has fallen by about 10% this year against the dollar, the Egyptian pound is more than 25% and the Turkish lira is 28%. .
Rich countries are not immune either: they have tended to stagnate due to rising energy prices, with the dollar becoming more valuable than the euro for the first time in 20 years and the British pound depreciating by 18% compared to a year ago.
Normally, countries benefit from currency depreciation, as it makes their products cheaper and more competitive abroad, but at the moment any gains from increased exports are negligible because economic growth is faltering almost everywhere.
Here are some of the ways a rising dollar causes pain overseas:
- It makes imports from other countries more expensive, adding to current inflationary pressures.
- It puts pressure on businesses, consumers and governments to borrow in dollars and the reason is that more local currency is needed to convert to dollars when loan payments are made.
- Central banks in other countries are forced to raise interest rates to try to support their currencies and prevent money from moving outside their borders, but higher interest rates hold back economic growth and increase unemployment.
According to Ariane Curtis of UK research institute Capital Economics: “The appreciation of the dollar is bad news for the global economy, and this is another reason to expect the global economy to fall into recession next year.
Therefore, the rise in the value of the dollar in 2022 is particularly painful, adding to global inflationary pressures at a time when prices were already rising, due to the Russian war against Ukraine and the Corona virus.
