The Economist: The strengthening of the dollar under the Donald Trump administration will surprise the world

Possible dollar strengthening under US President Donald Trump will shock the rest of the world, he says The Economist.

The index of large American companies broke consecutive records on November 6, 7 and 8. This reflects investors’ expectations about Trump’s policies – increasing profits for US companies through tax cuts and deregulation, while government borrowing is increasing.

The combination of higher deficits and higher inflation could then force the Federal Reserve to keep interest rates higher than it would without Trump. Higher interest rates would increase the attractiveness of investments in dollar securities, which would provide a “headwind” for the dollar and strengthen its demand.

At the same time, a stronger dollar increases import costs, which reduces demand for foreign goods and reduces the total volume of world trade, affecting countries whose economies depend on exports. . Especially the countries of Asia and Latin America.

“A study by the International Monetary Fund (IMF) confirmed in 2023 that a 10 percent increase in the value of the dollar in one year reduces output in developing economies by 1.9 percentage points. Fluctuations in the value of the dollar affect the world economy through two main channels: trade and finance More than 40% of world trade takes place in dollars A stronger dollar raises import costs, which reduces demand for goods from abroad This is why changes in the value of the dollar are more important than the behavior of local currencies in most Asian and Latin American countries. % drop in trade between the rest of the country Just as important as the effect of trade on the value of the US currency are the financial consequences for countries and companies that borrow in dollars but have no sources of income. an appreciating dollar automatically increases their debt burden and raises interest costs. Higher interest rates in America, along with a rising dollar, will also make investments in the rest of the world less attractive. Capital then tends to flow out of emerging markets, forcing them to raise interest rates as well, tightening monetary conditions just as their economies may begin to “suffer from a general slowdown in trade,” the paper said.

Radoslav Velkov