Today, the US dollar enjoys strength it hasn’t enjoyed in decades, and with its rapid rise, many developed and emerging economies are feeling the pressure they are under from dollar strength, while echoes of this groan are heard all over the world.
Last June, the dollar index, which measures the US currency against a basket of 16 currencies, rose 8.7% to its best position since 2010. Dollar strength prompted investors to withdraw from economies emerging markets to reinvest their money in the strong dollar.
With this, it can be confirmed that the strength of the dollar has not left its effects only in emerging economies, as the currencies of developed countries have suffered their share of pain and lost value against the US dollar.
For example, the pound sterling has lost 20 per cent of its value against the dollar since the beginning of the year and the euro has fallen below parity with the dollar in several months, registering the weakest level since 2002.
While the dollar was able to buy more than seven Chinese yuan for the first time since 2020, the Japanese yen has lost about a fifth of its strength against the dollar this year, and across emerging economies, the Egyptian pound has lost more than 25%. of its value, and the Hungarian forint fell 20% and lost The South African rand is about 9.5% of its value against the US currency.
Concerning these declines, James Hannon, financial analyst at the London Stock Exchange, told The Economist: “The increase in the value of the dollar has led to a drop in the index of emerging currencies by 3.5% this year, which it’s its lowest level in 18 months However, digging into the details will reveal that losses are greater than between 9 and 15 percent on currencies such as the Polish zloty and Turkish lira.
Some have described the current situation of dollar strength as the United States waging a currency war against the entire world, while some experts have argued that dollar strength is a natural result of rising interest rates seven times this year by the US Federal Reserve, and that the attraction for the dollar, master and strongest of currencies, is quite natural in the light of the relative stability enjoyed by the US economy, in the midst of the difficult international economic conditions that all they are crossing.
While others believe that what is more dangerous than the growing dollar strength is that attempts by policy makers in China, Japan, Europe and most – if not all – emerging economies have failed to defend their currencies in large numbers. measure in the face of the continuous rise of the dollar.
Professor Adam Westfield, professor of international economics at the University of London, comments to Al-Eqtisadiah, saying: ‘Rising value of the dollar threatens to exacerbate the growth slowdown and exacerbate the inflation problem for central banks in the world. The dollar’s role as the currency used in global trade and finance means that its fluctuations have far-reaching effects.”
He added: “However, although the currencies of advanced economies have declined against the dollar, their economic structures have not been seriously damaged, in contrast to the impact of the dollar’s rise in emerging economies. Financial pressures are intensifying in countries like Egypt, Sri Lanka, and Pakistan, all of which have asked the International Monetary Fund for help, emerging markets are escalating and seem unable to contain them.
The most serious challenge that experts believe emerging economies will face next year due to the appreciation of the dollar lies in the way they handle repayable debt. Emerging market governments have $83 billion worth of debt that they have to be repaid by the end of next year, according to data from the Institute of International Finance, and by making those payments, the debt will likely come at the expense of lower health and education spending.
But LM Gabriel, a financial analyst for emerging market economies at a number of UK financial institutions, believes emerging economies are still, despite the dollar’s growing strength against their home currency, able so far to escape the debt, but warns of the future, saying: “The problem facing emerging economies is not the value of the dollar.” Currently, but in the future, if the dollar continues to rise here, the disaster will fall and many emerging economies will not be able to deal with the debt issue.
The reason for this, he believes, is that emerging markets have run out of the means they can employ to attract more dollars.
He added: “Central banks in emerging economies have taken drastic measures to curb the depreciation of their currencies and bonds against the dollar. Argentina, for example, has raised interest rates to 75% as a way to curb the inflation and to defend the peso, which has lost nearly 30 percent of its value against the dollar since its inception.” For the year, Ghana also raised interest rates to 22 percent, but its currency has continued to decline, and therefore most emerging markets will not be able to continue raising interest rates, because that means that businessmen will not be able to work fully and the economy will stagnate.
The problem is that developing economies are not alone struggling to cope with the depreciation of their currency against the dollar, but the eurozone, which includes 19 European economies, is also suffering from the weakness of the euro against the dollar , at a time when it has so far failed to control inflation. And Christine Lagarde, president of the European Central Bank, announced last September and during a meeting of the European Central Bank that this year the European single currency had lost 12 percent of its value against the dollar, amid skepticism that the Raising European interest rates would solve the European economic dilemma represented by interest rates, inflation and the decline of European currencies.
The common suffering of emerging and developed economies from the ferocity of the dollar prompts some economists to speak of the need to take global actions to contribute to the weakening of the dollar despite their belief that the possibility of taking such a step is currently questionable. but they recall an earlier experience in 1985 when the US launched France, West Germany, the UK and Japan launched a joint effort known as the Plaza Accord to devalue the dollar amid fears at the time that strengthening the US currency would negatively affect the global economy.
But why does the United States intervene and cooperate with international efforts to weaken its currency?
Banking adviser Parish Christopher believes that the United States, as the leader of the global economy, is aware of the extent of the responsibility it has been entrusted with ensuring the balance of the international economy.
He says: “If the strong dollar causes severe economic crises for everyone, then everyone can band together to weaken it in a way that ultimately can lead to a weakening of US centralism in the international economy, and for that reason Washington can cooperate with emerging economies and developed to curb the dollar in order to avoid dire consequences.” .
And he adds: “If Washington refuses to cooperate and trading partners decide to retaliate by devaluing their national currencies, we will see a currency war that will not stop at financial losses, but can produce a distorted economic system.”
Indeed, the strong dollar has begun to leave negative imprints on the efforts of central banks around the world to fight inflation, so as to prompt China to work to save its national currency from continuous depreciation against the dollar by launching more liquidity in local markets, reducing the amount of reserves that banks must maintain and hold against deposits in foreign currencies.
However, experts believe that the US administration’s cooperation with others to control the growing power of the dollar is very important, but the current stage requires close attention to the situation in emerging economies, as it faces 11 emerging markets: Argentina, Chile , Colombia, Egypt, Ghana, Kenya, Tunisia, Pakistan, Hungary, Romania and Turkey – some of which have large population densities, the risk of a balance of payments crisis and, if such a crisis occurs, will inevitably result in a sharp recession in those markets and the direct impact on global GDP growth will be “-0.3 percent.”
Seven of these emerging markets, Argentina, Egypt, Ghana, Kenya, Tunisia, Pakistan and Turkey, have a high risk of sovereign default due to the growing dollar strength, meaning that the strong dollar has become a weakening factor for many of US allies, which requires a serious stance on the part of the US administration and the Federal Reserve to resolve these problems before it is too late.
