"Strong Dollar, a 'Big Problem' for the Global Economy... Still Early, Vulnerabilities to Worsen"

[Image source=Reuters Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] "The dollar is our currency. But it’s your problem." The remark made by John Connally, then U.S. Treasury Secretary, at the 1970s Group of Ten (G10) meeting is becoming reality once again. The once-in-a-generation phenomenon of the dollar’s extreme strength has been confirmed this year, posing a "big problem" for countries around the world except the United States.

The Wall Street Journal (WSJ) reported on the 18th (local time) that the severe volatility of the dollar, the major global reserve currency used in world trade and finance, is causing widespread repercussions. It is not only raising concerns about global economic slowdown but also intensifying inflation, thereby amplifying the headaches of central banks worldwide. Attempts by China, Japan, and Europe to defend their own currencies have failed due to the soaring strength of the dollar.

Last week, the Chinese yuan exchange rate surpassed 7 yuan per dollar for the first time since 2020. The Japanese yen also hit its lowest value in 24 years. The dollar index, which measures the dollar’s value against six major currencies, has surged more than 14% this year alone, marking the highest level since the index was established in 1985. The euro and pound sterling have also fallen to their lowest levels against the dollar in decades. Emerging markets have been hit hard as well. The Egyptian pound fell by 18%, the Hungarian forint by 20%, and the South African rand by 9.4%.

The recent dollar strength is largely due to aggressive interest rate hikes by the U.S. central bank, the Federal Reserve (Fed). Despite the rate hike cycle that began in March this year, U.S. inflation remains at multi-decade highs without signs of peaking. This has fueled expectations of further tightening, underpinning the strong dollar. The market anticipates the Fed will raise rates by at least 0.75 percentage points in September, with some speculating a 1 percentage point increase.

Additionally, worsening economic outlooks in China and Europe, contrasted with relatively better U.S. economic indicators, have contributed to the strong dollar. WSJ reported, "Europe is on the front lines of an economic war with Russia, and China is facing its biggest slowdown in years as the real estate boom collapses," adding, "The bleak economic outlook for the rest of the world is also driving the dollar higher."

The dollar’s extreme strength is expected to continue for the time being. Raguram Rajan, professor at the University of Chicago Booth School of Business, diagnosed it as "still in the early stages." Referring to his time as governor of the Reserve Bank of India and how Fed policies and the strong dollar impacted the world, he expressed concern that "the era of high interest rates will persist and vulnerabilities will accumulate."

Particularly problematic is the sharp increase in debt among emerging countries and corporations during the pandemic. U.S. rate hikes and the strong dollar inevitably increase the burden of dollar-denominated debt they must repay.

Earlier, the World Bank (WB) also warned in a report that the global economy is nearing recession and highlighted the possibility of a series of financial crises in emerging and developing countries. According to the Institute of International Finance (IIF), dollar-denominated debt maturing by the end of next year for emerging market governments amounts to $83 billion (approximately 115.37 trillion KRW).

Daniel Muneva, economist at the United Nations Conference on Trade and Development, expressed concern that "the cost of major food and fuel imports priced in dollars has become more expensive, exacerbating the suffering of small countries." Gabriel Stern, head of emerging markets research at Oxford Economics, stated, "If the dollar value rises further, it will be the straw that breaks the camel’s back," adding, "They are already heading toward a crisis phase, and what they least need is a strong dollar."

Some suggest the possibility of international joint measures to counter the strong dollar, similar to the 1985 Plaza Accord. However, WSJ cited experts saying the likelihood remains low for now. Paresh Upadhyaya, head of currency strategy at asset management firm Amundi, said, "There could be justification for coordinated intervention to lower the dollar’s value," adding, "Outside the U.S., the strong dollar is causing tremendous adverse effects."

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