Dollar rise signals trouble for global economies – Financial Post

The US dollar is experiencing a once-in-a-generation rally. This is a wave that threatens to worsen his stunting and intensify his headache. inflation for central banks.

The dollar’s role as the primary currency used in global trade and financial activity means that its fluctuations have far-reaching implications. The currency’s strength is being felt in Sri Lanka’s fuel and food shortages, Europe’s record inflation and Japan’s exploding trade deficit.

This week investors are closely watching the outcome of the Federal Reserve’s policy meeting for clues about the dollar’s path. The US central bank is expected on Wednesday to raise interest rates by at least 0.75% as it fights inflation – likely fueling further gains in the dollar.

It’s a worrying sign that efforts by policymakers in China, Japan and Europe to defend their currencies are largely failing in the face of the dollar’s relentless rise.

Last week, the dollar hit a key level against the Chinese yuan, with one dollar buying more than 7 yuan for the first time since 2020. Japanese officials, who had previously simply watched as the yen lost a fifth of its value this year, they began to publicly worry that the markets had gone too far.

The ICE US Dollar Index, which measures the currency’s parity against a basket of the currencies of the US’s largest trading partners, has strengthened more than 14% in 2022 and is on track to record its best year since the index’s launch in 1985 .The euro, Japanese yen and British pound have fallen to multi-decade lows against the dollar. Emerging market currencies have been hit: the Egyptian pound fell 18%, the Hungarian forint fell 20% and the South African rand lost 9.4%.

The dollar’s rise this year has been fueled by the FED’s aggressive rate hikes, which have encouraged global investors to pull money out of other markets to invest in higher-yielding US assets. Recent economic data suggests that US inflation remains stubbornly high, raising the possibility of more Fed rate hikes and an even stronger dollar.

The gloomy economic outlook for the rest of the world is also strengthening the dollar. Europe is on the front lines of an economic war with Russia. China is facing its biggest slowdown in years as a decades-long real estate boom reverses.

For the US, a stronger dollar means cheaper imports, a headwind for efforts to contain inflation and relative record purchasing power for Americans. But the rest of the world is getting squeezed under the rising dollar.

“I think it’s still early days,” said Raghuram Rajan, professor of economics at the University of Chicago’s Booth School of Business. When he was governor of the Reserve Bank of India (India’s central bank) last decade, he had complained bitterly about how FED policy and the strong dollar were hurting the rest of the world. “We will be in a high interest rate regime for some time. “Vulnerabilities will increase,” he said.

On Thursday, the World Bank warned that the global economy is headed for recession and “a series of financial crises in emerging market and developing economies that would cause them lasting damage.”

The stark message reinforces concerns that economic pressures are widening for emerging markets and not just known weak links such as Sri Lanka and Pakistan, which have already asked for help from the International Monetary Fund. Serbia became the latest to start talks with the IMF last week.

“A lot of countries have been going through a cycle of much higher interest rates since the 1990s. There’s a lot of debt out there that was built up by borrowing during the pandemic,” Mr Rajan said. Stress in emerging markets will widen, he added. “It’s not going to be contained.”

A stronger dollar makes it more expensive to repay debt that emerging market governments and companies have taken out in US dollars. 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.

“We have to look at this through a fiscal lens,” said Daniel Munevar, an economist at the United Nations Conference on Trade and Development. “You go into 2022 and suddenly the currency drops 30%. (Countries) will probably be forced to cut spending on health care, education, to cover these payments [χρέους]».

The currency’s rise has exacerbated problems in smaller countries, making critical imports of food and fuel priced in US dollars more expensive. Many have tapped their dollar and other foreign currency reserves to help finance imports and stabilize their currencies. And while commodity prices have eased from their highs in recent months, that has done little to ease pressure on developing countries.

If there is more dollar appreciation, that will be the last straw, said Gabriel Sterne, head of emerging market research at Oxford Economics. Many markets are already on the brink of crisis and “the last thing they need is a strong dollar,” he said.

Central banks in emerging markets have taken drastic measures to limit the depreciation of their currencies and bonds. Argentina raised interest rates on Thursday to 75% as it seeks to curb 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 continues to slide.

It’s not just developing economies that are struggling to cope with weaker currencies. In Europe, the weakness of the euro is fueling the historic rise in inflation caused by the war in Ukraine and the subsequent rise in gas and electricity prices.

At the European Central Bank’s meeting on September 8, President Christine Lagarde expressed concern about the euro’s 12% slide this year, saying it “has contributed to the build-up of inflationary pressures”. The ECB is signaling a more hawkish policy, with investors now expecting interest rates to rise to 2.5%. But this has done little to help the value of the coin.

The ECB is powerless against the strength of the dollar, said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “If the ECB becomes more hawkish, if there is some improvement in the economic outlook, whatever happens, it’s generally offset by further dollar strength,” he said.

US Treasury Secretary Janet Yellen acknowledged that the dollar’s appreciation could pose challenges for emerging economies, particularly those with large dollar debts. But he said in July he was not worried about a self-reinforcing cycle that could slow economic growth worldwide.

The dollar’s strength has hit Wall Street, weighing on U.S. companies’ earnings abroad and curbing investments linked to commodities such as gold and oil.

“The strong dollar has created a headwind for every major asset class,” said Russ Koesterich, co-head of Global Asset Allocation at BlackRock. “It’s another aspect of tighter economic conditions and that affects everything.”

Investors and economists see the prospect of global action to weaken the dollar growing – although they warn the likelihood of such a move remains remote. In 1985, the US, France, West Germany, the UK and Japan launched a joint effort, known as the Plaza Accord, to devalue the dollar amid concerns that it was hurting the global economy.

“There could be some justification for a concerted intervention to weaken the dollar,” said Paresh Upadhyaya, director of currency strategy at asset manager Amundi US. “Outside the US, the strong dollar is now becoming a huge headwind for central banks.” China’s central bank has sought to support the yuan by releasing more dollar liquidity into the market. It has also reduced the amount of reserves that banks must hold against their foreign currency deposits.

Chinese regulators’ heightened sensitivity to a falling yuan may be due to their concerns that a weak yuan could further erode consumer confidence, said Tommy Xie, head of research and strategy for greater China at OCBC Bank.

“A depreciated yuan can create a vicious cycle,” Mr Xie said.

In Japan, policymakers fear the yen’s fall to a 24-year low against the dollar is hurting business. Bank of Japan Governor Haruhiko Kuroda said this month that the yen’s sharp depreciation “is likely to destabilize the business strategy of companies.”

The yen’s weakness pushed Japan to its largest one-month trade deficit on record for August — 2.82 trillion yen, equivalent to about $20 billion — as the value of imports surged 50 percent on higher energy prices and currency drop.

Prime Minister Fumio Kishida said on Wednesday that Japan must find ways to capitalize on the positive effects of the yen’s depreciation. One solution: attract more tourists.

“It is important that we step up efforts to strengthen our nation’s revenue power,” he said.

Translated into Greek by the Economic Postmaster

The article is in Greek

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