In almost every country except the United States, the big dollar cripples the economy and destroys everything around it. It’s not America’s problem, at least for now, and the dollar’s historic rise isn’t likely to stop anytime soon.
According to some analysts, by some measures, the US dollar is already stronger than at the peak of the Covid-19 pandemic in early 2020. There is a similarity between the pain it causes and the chaos caused by money in the mid-1980s, when the big financial officials had to get together and force a solution on the markets. As the US administration abandons the idea of coordinated monetary intervention, it’s every country for itself.
As a result of the widespread economic damage, officials from Tokyo to Santiago were forced to adopt makeshift solutions, such as selling dollars on the open market. But Federal Reserve Chairman Jerome Powell is fully focused on fighting inflation at home, doubling down on interest rate hikes that have revived the dollar’s rally. And the US Treasury Secretary, Janet Yellen, said she thinks the financial markets are working well.
Rising interest rates
The combination of attractive US interest rates and the safety of your money in dollar-denominated assets helps support the dollar. In more normal times, officials may welcome weakening currencies, which spur economic growth by making exports more competitive and encouraging consumers and businesses to buy local.
But these are not ordinary times. High inflation is now a concern for officials from Frankfurt to Seoul, and weak currency adds fuel to the fire by increasing the price of imported goods and domestic prices. Therefore, some governments and central banks have to respond to the continuous torture of their currency.
British books, the biggest sufferer
The British pound has become the latest major currency to hit the spotlight after the government’s new financial plans led to a sharp drop in confidence in the pound. But like his peers before him, he was under tremendous pressure, trading near lows for several years. The yen has weakened so much that the Japanese government has intervened directly in the markets several times since September 22; India, Chile and other countries also found it necessary to intervene. Meanwhile, Europe’s single currency slipped below parity with the dollar under the weight of the region’s energy crisis, and the Chinese government waged its own battle for the yuan.
The currency situation is also forcing the world’s central banks to consider raising interest rates further, which could lead to a recession in their economies.
The journey continues
“The Fed is aware of the external consequences of their actions because the dollar is the world’s reserve currency, but they have internal power and focus on that,” said Paul McCulley, a former chief economist at Pacific Investment Management Co. who now teaches at Georgetown University. It’s unclear when these externalities might “turn from noise to a signal for the Fed to finally stop and turn around and influence what it’s doing,” he said. For now, McCulley sees the world dancing to the Fed’s evil tune and suffering from the “pain” that Powell himself warned about.
Key inflation indicators to guide further
From the Fed’s point of view, a strong dollar helps fight inflation. By curbing the competitiveness of American business enterprises on the international stage, it curbs the growth of the economy, thereby eliminating inflationary pressures. That gives authorities reason to not hold back as they pursue the most aggressive monetary tightening since Paul Volcker attacked runaway inflation in the 1980s. The strength of the dollar was also a problem until the so-called Plaza Accord curbed it. One important difference: the 1985 agreement between Britain, France, West Germany, Japan and the United States was made only after Volcker had already broken the back of inflation, while the outcome of the actual battle was still open to debate.
“Right now, the only important mandate for the Fed is to control inflation,” said Steven Roach, a senior fellow at Yale University and former chairman of Morgan Stanley Asia. According to Roach, it is largely due to this one idea that the world economy is headed for recession. “It will certainly change inflationary pressure – on the other hand, it may lead to some stabilization of the currency market – but in this case the cart will be before the horse,” he said. Atlanta Fed President Rafael Bostic acknowledged concerns that unrest in the UK could spill over into the US economy, posing risks to global growth. However, he did not abandon the idea of the Fed raising interest rates further.
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