A Stronger Dollar and a Weaker World

The Fed hikes interest rates on the dollar to strengthen the American economy. The dollar, however, is also the world’s reserve currency — banks, businesses, governments, etc. all conduct their international business mostly in dollars.

As the dollar increases, other currencies become relatively less valuable. In developing countries, for example, the stronger dollar increases the cost of imports, including essential food, energy, and medicine.

Most nations have significant foreign debt in dollars, and the increasing value is forcing countries like Argentina, Kenya, and Egypt closer to default. That risk produces a negative feedback loop, discouraging foreign investments in developing and emerging markets.

The Euro reached parity with the dollar for the first time since 2002 in June. The Pound just now dipped down to a record low against the dollar. The Brazilian real, the South Korean won, the Tunisian dinar, the Japanese Yen are all suffering at the hands of the dollar.

Meanwhile, America benefits. High interest rates promise high returns, stealing away investors from other markets. A £12 tin of tea from Britain that last year cost $16.44 only costs $13.03 today, and the same goes for all imports. Cheaper imports conveniently also serve to keep American inflation in check by increasing supply.

The US has power over global markets like no other country. Amid global crises, America can wield its economic might at the expense of the world.

Unfortunately, there is no magic solution. The Fed must raise interest rates to prevent worse effects in the long term. This economic decline is inevitable, given COVID-19 pandemic and the Russian invasion and weak supply chains and climate disasters.

Sources:

https://www.nytimes.com/2022/09/26/business/economy/us-dollar-global-impact.html