Dollar’s Rise Spells Trouble for Global Economies

The US dollar is experiencing a one-off rally. That is a big problem for the rest of the world.

The dollar’s role as the main currency used in world trade and finance means that its fluctuations have widespread repercussions. The currency’s strength is being felt in Sri Lanka’s fuel and food shortages, record inflation in Europe and Japan’s exploding trade deficit.

The wave threatens to exacerbate a slowdown in global growth and increase inflation headaches for global central banks. A worrying sign is that efforts by policymakers in China, Japan and Europe to defend their currencies are largely failing in the face of the dollar’s relentless gains.

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Last week, the dollar steamed through an important level against the Chinese yuan, with one dollar buying more than 7 yuan for the first time since 2020. Japanese officials, previously sidelined as the yen lost a fifth of its value this year, began to worry publicly that markets were going too far.

The ICE US Dollar Index, which measures the currency against a basket of its largest trading partners, is up more than 14% in 2022, heading into its best year since the index’s launch in 1985. The euro, the Japanese yen and the pound sterling have fallen to a multi-decade low against the greenback. Emerging market currencies have been battered: the Egyptian pound is down 18%, the Hungarian forint is down 20% and the South African rand is down 9.4%.

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The dollar’s gains this year have been fueled by the Federal Reserve’s aggressive rate hikes, which have encouraged global investors to take money from other markets to invest in higher-yielding US assets. Recent economic data suggests that US inflation remains stubbornly high, reinforcing the case for more Fed rate hikes and an even stronger dollar.

The bleak economic outlook for the rest of the world is also boosting the dollar. Europe is on the frontline of an economic war with Russia. China is facing its biggest slowdown in years as a multi-decade real estate boom unravels.

Performance against the US dollar, so far

For the US, a stronger dollar means cheaper imports, a tailwind for inflation-control efforts and record relative purchasing power for Americans. But the rest of the world is suffering from the appreciation of the dollar.

“I think it’s too early,” said Raghuram Rajan, a professor of finance at the University of Chicago’s Booth School of Business. While serving as governor of the Reserve Bank of India for the past decade, he loudly lamented how Fed policies and a strong dollar affected the rest of the world. “We will be in a high-rate regime for a while. The vulnerabilities will increase.”

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

The grim message raises concerns that financial pressures are mounting for emerging markets beyond known weak links such as Sri Lanka and Pakistan, which have already sought help from the International Monetary Fund. Serbia was the last to start talks with the IMF last week.

“Many countries have not experienced a cycle of much higher interest rates since the 1990s. There is a lot of debt out there, supplemented by loans during the pandemic,” said Mr. rajan. Stress in emerging markets will increase, he added. “It won’t be curtailed.”

A stronger dollar makes US dollar-denominated debts incurred by governments and companies in emerging markets more expensive to repay. According to data from the Institute of International Finance, which covers 32 countries, emerging market governments have $83 billion in debt due by the end of next year.

“You have to look at this through a budgetary lens,” said Daniel Munevar, an economist at the United Nations Conference on Trade and Development. “You go into 2022 and all of a sudden your currency drops by 30%. You will probably be forced to cut back on health care, on education to meet that [debt] payments.”

Cumulative interest rate changes since January 2021

Central bank of Brazil starts raising

interest in March 2021

The rise of the currency has exacerbated the pain in smaller countries as crucial imports of food and fuel, priced in the US dollar, have become more expensive. Many have tapped stockpiles of dollars and other foreign currencies to help finance imports and stabilize their currencies. And while commodity prices have retreated from their all-time highs in recent months, it has done little to ease pressure on developing countries.

“If the dollar rises more, that’s the straw that breaks the camel’s back,” said Gabriel Sterne, head of emerging markets research at Oxford Economics. “You’re already getting frontier markets at the tipping point of a crisis, the last thing they need is a strong dollar.”

Emerging market central banks have taken drastic measures to contain the depreciation of their currencies and bonds. Argentina raised interest rates to 75% on Thursday as it seeks to curb rising 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 the currency continues to fall.

It’s not just emerging economies struggling with weaker currencies. In Europe, the weakness of the euro amplifies a historic rise in inflation caused by the war in Ukraine and a consequent rise in gas and electricity prices.

At the European Central Bank meeting on September 8, President Christine Lagarde expressed concern about the euro’s 12% decline this year, saying it “has contributed to the build-up of inflationary pressures”. The ECB is signaling a more aggressive policy stance, with investors now forecasting yields to rise to 2.5%. But that has contributed little to the value of the currency.

The euro is one of the currencies that has fallen to a multi-decade low against the dollar.


Gregorio Borgia/Associated Press

The ECB is powerless against the strength of the dollar, said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management. “Whether the ECB becomes more aggressive, or there is some improvement in the economic outlook, come what may, it will generally be offset by a further strong dollar,” he said.

US Treasury Secretary Janet Yellen acknowledged that the appreciation of the dollar could pose a challenge to emerging economies, especially those with large dollar-denominated debts. But she said in July she was not concerned about a self-reinforcing cycle that could slow global economic growth.


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The strength of the dollar has spread across Wall Street, weighing on the profits made by US companies abroad and controlling investment in commodities such as gold and oil.

“The strong dollar has created headwinds for just about every major asset class,” said Russ Koesterich, co-head of Global Asset Allocation at BlackRock..

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

Investors and economists are putting forward the prospect of global action to help the dollar weaken, though they warn that the likelihood of such a move remains slim. In 1985, the US, France, West Germany, the UK, and Japan launched a concerted effort known as the Plaza Accord to devalue the dollar over concerns that it was weighing on the global economy.

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

China’s central bank has tried to prop up the yuan by releasing more dollar liquidity into the market. It has reduced the amount of reserves banks are required to hold for their foreign exchange deposits and has consistently pushed daily fixing – a reference point for the currency – ahead of market expectations.

The dollar is getting stronger. That may sound like something to be happy about, but a rise in the value of the dollar could ripple through the economy in unexpected ways. Julia-Ambra Verlaine of WSJ explains. Illustration: Jordan Kranse

Chinese regulators’ heightened sensitivity to the yuan’s decline may stem from concerns that a weak yuan could further dampen consumer confidence, said Tommy Xie, chief of research and strategy for Greater China at OCBC Bank.

“A depreciating yuan can create a vicious circle,” said Mr. xie.

In Japan, policymakers fear that the yen’s drop to its 24-year low against the dollar will hurt businesses. Bank of Japan Governor Haruhiko Kuroda said this month that the steep depreciation of the yen “is likely to make companies’ business strategy unstable.”

The yen’s weakness propelled Japan into its largest trade deficit in a month recorded in August – 2.82 trillion, which is equivalent to about $20 billion – as the value of imports rose 50% due to higher energy prices and the decline of the currency.

Prime Minister Fumio Kishida said on Wednesday that Japan must come up with ways to leverage the positive effects of the yen’s depreciation. One solution: invite more tourists.

“It is important to strengthen efforts to increase the earning capacity of our nation,” he said.

—Julia-Ambra Verlaine contributed to this article.

The weakness of the yen propelled Japan into its largest one-month trade deficit in August.


Noriko Hayashi/Bloomberg News

Write to Chelsey Dulaney at [email protected], Megumi Fujikawa at [email protected] and Rebecca Feng at [email protected]

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