Rising US Dollar Impact Extends from Emerging to Developed Economies

The appreciation of the Dollar to a multi-decade high has impacted the developing economies. The Federal Reserve pushed to tighten the monetary policy- a first in many years; the stronger green currency pushes rival money lower, driving up the imported goods price and fueling inflation in other economies.

The development has put pressure on other countries central banks to increase interest rates as surging consumer prices make Europe economies go limp. Increased borrowing costs have cooled the housing market in Australia, New Zealand, and Canada, and these seem to have limited influence on dollar strength, implying that short-term relief is still far off.

The Federal Reserve tightening is not new, and global ripples have been felt earlier. Still, this time a seriously strong dollar is more notable against developed countries as a group vis a vis emerging economies.

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Some of the worst-performing currencies globally in 2022 are developed economies like Sri Lanka, the Ruble of Russia, and the commodity-backed Brazil real. According to Sayuri Shirai, a Bank of Japan former board member and now a professor at Keio University, the other countries cannot stop the currency from weakening by raising the interest rates.

This is because the Dollar’s strength not only reflects the expectations of the rate hikes in federal funds later this year and consequently demand the US fixed income instruments but also reflects the risk arising from higher-than-expected rate hikes globally.

The difficulty will be seen in the coming days as central banks in Europe consider hiking rates by a record 75 basis points while dealing with zero inflation and a below dollar parity of the Euro. The Reserve Bank of Australia has given a 50-basis point hike, while the Bank of Canada is poised to raise by 75 basis points.

The UK, which is already in recession according to some business groups, will see the Bank of England tightening the policy further on September 15 as it confronts investors when the pound is at the lowest since 1985.

Bank of Japan Governor Haruka Kuroda also stuck to the monetary support when the Yen faced the lowest in a quarter century. The federal reserve has not yet raised the rates in September; the relief for global currencies will come only after the US counterparts get the consumer prices in control.

In the last year of the fed’s tightening mode, many developed economies have struggled like many emerging economies. Bloomberg tracked 31 major exchange rates and found four developed nations were the biggest losers while only the Canadian Dollar was among the ten best performers.

The bank of Japan chief feels that recent supply-driven inflation in consumer prices will not last as more businesses and households are getting restless. The Yen dropped amidst the soaring import and energy costs even as the officials warned against excess volatility.