The rise of the dollar causes problems for global economies

The US dollar is experiencing a one-time high in a generation, a rise that threatens to get worse slowdown in growth The inflation problems of global central banks are amplified.

The dollar’s role as the primary currency in global trade and finance means that its fluctuations have wide-ranging effects. Currency strength is felt in Fuel and food shortages in Sri Lankain Record inflation in Europe And in Japan’s exploding trade deficit.

This week, investors are closely watching the outcome of the Fed’s policy meeting for clues about the dollar’s trajectory. On Wednesday, the US central bank is expected to raise interest rates by at least 0.75 percentage points while fighting inflation – likely to fuel gains in the US currency.

In a worrying sign, attempts by policy makers in China, Japan and Europe to defend their currencies have largely failed in the face of the dollar’s continued rally.

Last week, the dollar moved across a key level against the Chinese yuan, at 1 Buy a dollar more than 7 yuan For the first time since 2020. Japanese officials, who had previously stood aside as the yen lost a fifth of its value this year, Public concern began That the markets were going too far.

The ICE US dollar index, which measures the currency against a basket of its largest trading partners, rose more than 14% in 2022, on track for its best year since the index was launched in 1985. The euro, the Japanese yen and the euro The British pound has fallen to its lowest level in decades against the dollar. Emerging market currencies were hit: the Egyptian pound fell by 18%, the Hungarian forint fell by 20%, and the South African rand lost 9.4%.

The dollar’s rise this year fueled by Sharp interest rate increases by the Federal ReserveThis encouraged global investors to withdraw funds from other markets to invest in higher-yielding US assets. Recent economic data indicates that US inflation remains stubbornly high, strengthening the case for further increases in the Federal Reserve and a stronger dollar.

The bleak economic prospects for the rest of the world are also supporting the US currency. Europe on the front lines of Economic war with Russia. China is facing the biggest slowdown in years as The multi-decade real estate boom unfolds.

For the US, a stronger dollar means cheaper imports, a tailwind of efforts to contain inflation, and Record relative purchasing power of Americans. But the rest of the world is nervous as the dollar rises.

“I think it’s early yet,” said Raghuram Rajan, a professor of finance at the University of Chicago’s Booth School of Business. When he held the position of Governor of the Reserve Bank of India in the last decade, complained out loud On how Federal Reserve policy and a strong dollar affect the rest of the world. “We will be in a high price system for a while. Weaknesses will accumulate.”

Performance against the US dollar, since the beginning of the year

The World Bank warned Thursday that the global economy is heading into a recession and “a series of financial crises in emerging markets and developing economies that would do them lasting harm.”

The stark message adds to fears that financial pressures are expanding to emerging markets outside of known weak links like Sri Lanka And Pakistan, which has already requested assistance from the International Monetary Fund. Serbia became newer to open talks with the International Monetary Fund last week.

“Not many countries have gone through a much higher interest rate cycle since the 1990s. There is a lot of debt that has increased due to borrowing in the pandemic,” Mr. Rajan said, adding that pressures in emerging markets would expand. “It will not be contained.”

The rising dollar makes debts that emerging market governments and companies take out in US dollars more expensive to pay off. Emerging market governments have $83 billion of debt maturing by the end of next year, according to data from the Institute of International Finance covering 32 countries.

“You have to look at this from a budgetary perspective,” said Daniel Monívar, an economist at the United Nations Conference on Trade and Development. “You go into 2022 and all of a sudden your currency is down 30%. You will likely have to cut back on healthcare and education spending to meet those expenses. [debt] payments. “

Cumulative changes in interest rates since January 2021

The Central Bank of Brazil begins to raise its value

Interest rate in March 2021

The appreciation of the currency has exacerbated the pain in smaller nations by making food and biofuel imports priced in US dollars more expensive. many have Exploiting them in stocks of dollars and other foreign currencies To help finance imports and stabilize their currencies. And while commodity prices have retreated from their highs in recent months, this has done little to ease pressure on developing countries.

“If you get any further dollar appreciation, it will be the straw that broke the camel’s back,” said Gabriel Stern, head of emerging markets research at Oxford Economics. “The frontier markets are already on the verge of turning into a crisis, and the last thing they need is a strong dollar.”

Central banks in emerging markets have taken drastic steps to stem the devaluation of their currencies and bonds. Argentina raised interest rates Thursday to 75% as it sought to curb spiraling inflation and defend the peso, which has lost nearly 30% against the dollar this year. Ghana also surprised investors last month by raising interest rates to 22%, but its currency continued to decline.

It is not just developing economies that are struggling to deal with weaker currencies. In Europe, the weakness of the euro is amplifying the historical increase in inflation caused by the war in Ukraine and Gas and electricity prices go up.

At the European Central Bank meeting on September 8, President Christine Lagarde expressed her concerns about the euro’s 12% decline this year, saying it had “increased inflationary pressures”. The European Central Bank is signaling a more aggressive stance on policy, with investors now expecting interest rates to rise to 2.5%. But that didn’t do much to help the currency’s value.

The euro is among the currencies that have fallen to multi-decade lows against the dollar.


picture:

Gregorio Borgia / The Associated Press

Frederic Ducrozet, head of macroeconomic research at Pictet Wealth Management, said the European Central Bank is powerless against the dollar’s strength. “Whether the ECB is more hawkish, whether there is some improvement in the economic outlook, whatever happens, it is generally offset by more dollar strength,” he said.

US Treasury Secretary Janet Yellen acknowledged that a rising dollar could pose challenges to emerging economies, particularly those with large dollar-denominated debt. But it said in July that it was not concerned about the self-reinforcing cycle that could slow economic growth globally.

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The dollar’s strength spread across Wall Street, affecting the profits of American companies abroad and keeping investments linked to commodities such as gold and oil.

Ross Koestrich, co-chair of global asset allocation at

Black stone.

“It’s another aspect of tighter financial conditions and that affects everything.”

Investors and economists are raising the prospect of global action to help weaken the dollar – although they warn that the chance of such a move remains slim. In 1985, the United States, France, West Germany, the United Kingdom, and Japan launched a joint effort, known as the Plaza Accord, to devalue the dollar amid concerns that it was affecting the global economy.

“There may be some justification for a coordinated intervention to weaken the dollar,” said Paresh Upadhyaya, director of currency strategy at asset management firm Amundi US. “Outside the US, a strong dollar is now a negative headwind for central banks.”

China’s central bank tried to support the yuan By unleashing more dollar liquidity in the market. It has reduced the amount of reserves that banks need to hold against their foreign currency deposits, and has consistently set daily peg – a reference point for the currency – stronger than market expectations.

The dollar is getting stronger. While this may sound like something to cheer you up, a rise in the value of the dollar can spread through the economy in unexpected ways. WSJ’s Julia-Ambra Verlaine explains. Illustration: Jordan Crans

Tommy Shih, head of Greater China Research and Strategy at OCBC Bank, said Chinese regulators’ growing sensitivity to the yuan’s decline may stem from their concerns that a weaker yuan has the potential to further erode consumer confidence.

“The depreciation of the yuan can create a vicious cycle,” said Mr. Xie.

In Japan, policy makers fear that the yen’s slide to a 24-year low against the dollar is hurting business.

Bank of Japan

Governor Haruhiko Kuroda said this month that the sharp decline in the value of the yen “is likely to make corporate business strategy unstable.”

A weak yen helped push Japan to its largest-ever single-month trade deficit in August – 2.82 trillion yen, equivalent to about $20 billion – as the value of imports increased 50% due to higher energy prices and a weaker currency.

Prime Minister Fumio Kishida said on Wednesday that Japan needs to find ways to take advantage of the positive effects of the yen’s depreciation. One solution: invite more tourists.

“It is important to step up efforts to enhance our country’s earning capacity,” he said.

Julia Ambra Verlaine contributed to this article.

The weak yen helped push Japan to its largest trade deficit in a single month ever in August.


picture:

Noriko Hayashi/Bloomberg News

Write to Chelsey Dulaney at chelsey.dulaney@wsj.com, Megumi Fujikawa at megumi.fujikawa@wsj.com, and Rebecca Feng at rebecca.feng@wsj.com

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