The strength of the US currency creates global economic and social turmoil
The dollar index surpassed a top-of-110 target against the currency basket during the first week of this month to increase the purchasing power of the US citizen and increase pressure on non-US citizens around the world.
Amid expectations that the US Federal Reserve will continue to raise interest rates due to the wave of inflation that has not yet ended, the dollar is starting new targets that could reach 115, in a currency war that has begun to take root through Russia – Chinese measures to combat the dominance of the US currency on the global economy.
The rise of the dollar raises the prices of goods and services quoted in it, in all countries that hold other currencies, lowers gold and oil and creates financial crises for countries that are heavily dependent on imports. The dollar’s rally took the euro below par, hit the pound to a 37-year low, and rose against the Japanese yen to a 25-year high.
Faced with these repercussions of the dollar rise, Russia and China are trying to establish a new “international order” that does not necessarily depend on the US dollar as the main currency in trade and financial exchanges, like Russian President Vladimir Putin and the Chinese. Xi Jinping tried to mobilize Asian leaders to consolidate a new international order when they met on Friday The Past as part of a summit to challenge American influence.
Russia sets out to consolidate its economic relations, through bilateral cooperation with countries, which mainly depends on the use of national currencies, to reduce its dependence on the dollar, which becomes stronger and stronger, which increases the pressure on central banks. of emerging countries.
There is trade between China, the second largest economy in the world, and Russia, one of the largest economies in the world, in national currencies; The Chinese yuan and the Russian ruble, as well as some European countries that pay for gas in Russian ruble to avoid interrupting supplies.
And recently, Turkish President Recep Tayyip Erdogan said that Turkey will transfer “a quarter” of Russian gas payments to the ruble and plans to extend the use of the Russian payment system (Mir) to deepen economic relations afterwards. that major Russian financial institutions were excluded from the network of global financial contacts between “Swift” banks, in the framework of Western sanctions, following the Russian invasion of Ukraine.
More earnings for the dollar
Ricardo Evangelista, senior currency analyst at ActivTrades brokerage, expects higher gains for the US dollar amid the possibility that the US central bank will decide next Wednesday to raise interest rates by a full percentage point, “which expects further gains for the US dollar. dollar against the Euro. “
Evangelista explains to Asharq Al-Awsat: “The single currency continues to decline against the dollar, despite the European Central Bank raising interest rates by 75 basis points earlier this month, and the growing belief among traders that the same decision will be repeated in October (October) …. The situation in Europe is still complicated, especially in light of the ongoing energy crisis which does not lead to optimism about the economic future of the region … At the same time, on the other side of the Atlantic, we find the US Federal Reserve committed to its decision to fight inflation and even greater determination after the release of inflation data for the month of August (August), which was better than expected. “
A new high for the dollar index
Ahmed Moati, CEO of “ViMarkets” in Egypt, believes that “after the dollar index reaches the top of 110, we expect it to reach 112 against the basket of currencies, and if it is breached, it will reach 115, as a result of the continuation of the Russo-Ukrainian war, and the continuation of the US Federal Reserve. ” in raising interest rates, “referring to statements by US Federal Reserve Chairman Jerome Powell regarding the priority of reducing inflation rates by raising interest rates at the expense of higher economic growth.
Moati explained to Asharq Al-Awsat that greater demand for the US dollar, following its continued rise, is drawing more dollar liquidity from emerging markets: “The money goes to the dollar … that is, to anyone who owns it other currencies. converts them into dollars “.
The rush to the dollar necessarily leads to “a decline in the currencies of other countries due to a lack of demand for them, and therefore a decrease in their purchase value”, referring to the economic and social turmoil that some countries are witnessing due to the falling in the value of their currencies such as England and Germany, saying, “We are now experiencing a currency crisis … the dollar”.
Muati said the currency war started to show its characteristics from the trade war between America and China, announced by former US President Donald Trump, “but the rules of the currency war have started to take root now because of the expanding the circle of countries seeking to reduce the hegemony of the US dollar “, referring mainly to Russia and China.
However, Maati expected a small impact from these Russo-Chinese steps in the currency war, with some bilateral agreements between some countries recently to exchange national currencies among themselves, explaining: “As long as the dollar controls foreign cash reserves. of countries, and a barrel of oil is priced in dollars, the dollar will remain. It is the king in the currency war, and it is already the king. “
He added, “We need 10 to 20 years to see a dollar collapse if most countries adopt national currencies in their trade,” noting that the US economy is still able to absorb shocks and that. gives more momentum to the dollar.
For his part, market analyst Pierre Verrett indicated that investors continue to flee the equity and bond markets, especially after the recent US inflation report confirmed that the Fed’s tight policies will not stop or even slow in. near future.
He said: “Many investors did not fully expect this change in the positions of the US Federal Reserve and the European Central Bank, as it is difficult to predict how long these policies will continue, with recent economic data confirming the medium and long-term threats. and this has led to the sharp downward movements in stocks over the past week. “
The dollar index, which measures the value of the US currency against a basket of six currencies: the euro, the British pound, the Japanese yen, the Chinese yuan and the Swiss franc, fell 0.1% during the trading on Friday at 109.68.
The index reached its highest level in the last two decades, when it registered 110.79, during the first week of this month, and the index has risen by 0.6% in the last week and by around 15%. in the current year so far.
The rise in the dollar pushed the Chinese yuan in off-mainland trading below the 7 level against the dollar for the first time in more than two years. Likewise, the yuan within the mainland broke through the same barrier shortly after the markets opened on Friday.
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