Economist> How the very strong dollar is killing the economies of other countries, even those of very close US allies

The dollar looks increasingly strong. As US growth has remained strong and investors have scaled back bets that the Federal Reserve will cut interest rates, cash has flooded into the country’s markets -and the dollar has soared 4% this year, with most reliable data pointing to further appreciation.

With the US presidential election looming, and both Democrats and Republicans determined to boost American manufacturing, the world is on the verge of a difficult new era of strong dollar geopolitics.

This situation is made even more difficult by the fact that the dynamics of the currency reflects the weakness of others: By the end of 2023, America’s economy was 8% larger than at the end of 2019. The economies of Britain, France, Germany and Japan each grew by less than 2% over the same period. The yen is at a 34-year low against the dollar. The euro has fallen to $1.07 from $1.10 at the start of the year. Some traders are now betting that the euro and dollar will reach parity by early next year.

Should Donald Trump win in November, which is highly likely, the stage is set for another battle. A strong dollar tends to raise the price of US exports and lower the price of imports, which will widen China’s persistent trade deficit. THE Robert Lighthizer, the architect of anti-China tariffs during Trump’s time in the White House, wants the dollar weakened, according to Politico. President Joe Biden has not made public announcements about the currency, but a strong dollar complicates his production agenda.

Otherwise, a strong dollar is good for exporters who have costs in other currencies. But high US interest rates and a strong dollar are creating imported inflation, now exacerbated by relatively high oil prices. In addition, companies that have borrowed in dollars face higher repayments. On April 18, Kristalina Georgieva, head of the IMF, warned of the impact of these developments on global financial stability.

Many countries have plenty of foreign reserves they could sell to shore up their currencies: Japan has $1.3 trillion, India $643 billion and South Korea $419 billion. However, any relief would be temporary. Although the selloff slowed the dollar’s strengthening in 2022, when the Fed began raising interest rates, they did not stop it. And central banks and finance ministries cannot squander their fortunes in fruitless battles.

Another option is international coordination to stop the rise of the dollar. The beginning of something like this happened on April 16, when the finance ministers of America, Japan and South Korea expressed concern about the yen’s decline and finally won. This may be the harbinger of more intervention — in the form of joint sales of foreign exchange reserves — to prevent further weakening of the two Asian currencies.

But as much as these countries may want to be on the same page, the economy inevitably pushes them apart. After all, the weakness of the yen and won is driven by the interest rate gap between America and other countries. South Korea’s two-year government bonds are yielding around 3.5%, Japan’s just 0.3%, while US bonds maturing at the same time are yielding 5%. If interest rates remain significantly higher in America, yield-seeking investors face a simple choice – and their decisions will support the dollar.

Then there are countries with which America is least likely to do business. According to Goldman Sachs, China saw about $39 billion in foreign currency outflows in March as investors left the country’s sagging economy – the fourth biggest of any month since 2016. The yuan has fallen steadily against the dollar since the start of the year, and more rapidly since mid-March, when the dollar rose from 7.18 yuan to 7.25. Bank of America expects it to reach 7.45 by September, when America’s election campaign will be in full swing. That would put the yuan at its weakest period since 2007, providing a boost to China’s government’s latest export push. Cheap Chinese electric vehicles may get even cheaper, angering American politicians.

Even so-called protectionists in America may be willing to overlook weak allies’ currencies, at least for a while. It is less likely for China. That raises the risk of further tariffs and sanctions, and perhaps even putting China back on the US list of currency manipulators. As long as America’s economy performs better, the dollar is likely to remain strong. And as long as American politicians see this as a cause for concern, trade tensions will rise.