Dollar Strength Nears Plaza Accord Levels... Emerging Market Debt Risks Increase

BIS Real Effective Exchange Rate at 138.7 in July 'Highest Since 1985 Plaza Accord'
Then to Improve US Trade Deficit... Now Strong Dollar Helps Curb Inflation
Emerging Markets with High External Debt Face Increased Burden as Currency Values Fall

[Asia Economy Reporter Park Byung-hee] An analysis has emerged that the value of the US dollar, which has been showing unprecedented strength day after day, has reached levels just before the 1985 Plaza Accord. The ultra-strong dollar is increasingly raising debt risks in emerging countries.

On the 2nd, Nihon Keizai cited the real effective exchange rate published monthly by the Bank for International Settlements (BIS), explaining that the dollar's value is at its highest since 1985. The BIS real effective exchange rate is an indicator that shows the real value of each country's currency considering inflation and trade weights.

BIS calculates a broad real effective exchange rate reflecting trade weights of 60 countries and a narrow real effective exchange rate considering trade weights of 27 countries. The narrow real effective exchange rate has been published since 1964, and the broad real effective exchange rate since 1994.

The broad real effective exchange rate of the US dollar recorded an all-time high of 129.7 in July this year. The previous highest was 129.0, recorded in February 2002. The narrow real effective exchange rate of the dollar was 138.7 in July, a figure close to 140.3 in September 1985, when the Plaza Accord took place.

The Plaza Accord refers to the agreement where the finance ministers of five countries?the United States, United Kingdom, France, Germany, and Japan?gathered at the Plaza Hotel in New York to resolve the strong dollar by inducing appreciation of the yen and the German mark. Just before the Plaza Accord, the yen traded at 240 yen per dollar, but after the accord, a long-term appreciation followed, and by 1995, the yen traded at 80 yen per dollar.

The US led the Plaza Accord to improve its massive trade deficit. However, it seems unlikely that the US will now induce a weak dollar as it did in the past. Currently, the US is more urgently concerned with inflation, which has risen to the highest level in 41 years, rather than the trade balance. A strong dollar can help suppress inflation by lowering import prices.

Recently, Bruce Kasman, Chief Economist at JP Morgan Chase, predicted that the global consumer price inflation rate in the second half of this year will fall to 5.1%, half the level of the first half, showing signs of easing inflation. He especially expects that the US will be the first among major advanced countries to stabilize prices thanks to the strong dollar.

The ultra-strong dollar has mostly triggered debt crises in emerging countries. The strong dollar lowers the value of emerging market currencies, increasing the debt repayment costs for emerging countries with large foreign debts.

A representative case is the dollar strength caused by the US raising its benchmark interest rate to 20% to curb inflation soaring to 14.8% in 1980, which led to the Latin American debt crisis in the 1980s. Also, the strong dollar in the mid-1990s influenced the Mexican currency crisis and the Asian financial crisis.

After the 2008 financial crisis, prolonged low-interest-rate policies have significantly increased emerging countries' debt. According to the World Bank, as of 2020, the debt-to-GDP ratio of emerging countries was 207%, double that of ten years ago. The International Institute of Finance (IIF) reported that the debt scale of emerging countries was $98.6 trillion as of the end of March this year, a 10% increase from a year earlier.

This content was produced with the assistance of AI translation services.