A US dollar pushed to a six-month high by a reassessment of US interest rates exposed pockets of currency stress in Asia
A US dollar pushed to a six-month high by a reassessment of US interest rates exposed pockets of currency stress in Asia. The Japanese yen and Korean won fell to historic lows, and other currencies, from the euro to the yuan, have since tumbled.
Investors will choose the dollar to cling to better yields and supercharged US growth. This threatens to put more pressure on the value of the dollar, with risks to the world economy.
The dollar can export inflation
First, a strong dollar alters trade flows, with the potential to renew global inflation, FT economists warn. It increases America’s purchasing power, allowing American consumers and businesses to take goods from other economies.
The dollar can export inflation to countries that have already started to clamp down on rising prices, as local consumers and businesses have to pay more for dollar-priced goods.
Commodity prices have also moved in line with the dollar since 2020, according to the Bank for International Settlements.
Second, trade changes can be particularly destabilizing for the US. A strong dollar makes imports more attractive while exports are priced lower. It would serve to discourage the Biden administration in its struggle with the persistent trade deficit.
Advantage China
Third, a stronger dollar paired with a stagnant Chinese economy could allow Chinese products to flood markets, especially in critical sectors where the country already has a price advantage.
Fourth, a rising dollar could exacerbate existing strains in the financial system, particularly by increasing debt repayments faced by emerging economies. IMF Managing Director Kristalina Georgieva has warned that high US rates could trigger a series of defaults – with the potential for regional or global spillovers.
Potential solutions are few and far between. Many countries are sitting on large reserves and could sell dollars. Some may choose to raise interest rates to rein in the dollar, but they risk holding back economic growth.
What Donald Trump says
The dollar’s longer-term trajectory may ultimately come down to the November presidential election. Biden had no comment on the strong US currency.
Donald Trump, meanwhile, called the dollar’s gains a “disaster.” Some of those he is likely to pick for economic office, including former trade representative Robert Lighthizer, have launched drastic measures to deal with the strong dollar and rising US debt, including reportedly devaluing the dollar.
Such actions would achieve their immediate goals, but could erode global confidence – and create a host of new problems.
