The Global Economy Strained by Strong Dollar... "It's Just the Beginning"

[Image source=Yonhap News]

[Asia Economy New York=Special Correspondent Joselgina] "The dollar is our currency. But it’s your problem." This warning by John Connally, then U.S. Treasury Secretary, at the 1970s Group of Ten (G10) meeting is becoming a reality once again. The sharply rising value of the dollar this year is hitting countries worldwide except the United States. Analysts say the so-called 'King Dollar' offensive is "just getting started."

The Wall Street Journal (WSJ) diagnosed on the 18th (local time) that "the ultra-strong dollar, used as a major currency in global trade and finance, is causing problems for countries other than the U.S."

The Dollar Index, which measures the value of the dollar against six major currencies, closed last week at 109.76, marking a rise of more than 14% this year alone. Ahead of the Federal Reserve’s (Fed) interest rate decision on the 20th-21st, the dollar is again aiming for the 110 mark amid expectations of continued strength. If this continues, this year’s increase could be the largest since the index was launched in 1985.

Meanwhile, major currencies are weakening. Representative examples include the Chinese yuan, which broke the 7-yuan-per-dollar level last week; the Japanese yen, which fell to its lowest value against the dollar in 24 years; and the euro, which lost its parity of 1 dollar = 1 euro. WSJ pointed out that the once-in-a-generation ultra-strong dollar is causing widespread repercussions, "not only raising concerns about global growth slowdown but also intensifying inflation, thereby increasing headaches for central banks worldwide."

The recent persistence of the strong dollar is due to high-intensity tightening by major central banks and fears of recession. Charles Schwab, a U.S. asset management firm, forecasted, "Considering relatively solid U.S. economic indicators, the Fed’s monetary tightening, and the dollar’s status as a safe-haven currency, this strong dollar trend will continue through 2023." Raghuram Rajan, a world-renowned scholar and former Governor of the Reserve Bank of India (RBI), now a professor at the University of Chicago Booth School of Business, diagnosed the strong dollar phenomenon as "still in its early stages," expressing concern that "the high-interest-rate era will continue for some time, and vulnerabilities will accumulate."

In particular, the surge in emerging market debt and corporate debt during the pandemic is identified as a major risk. U.S. interest rate hikes and the strong dollar inevitably increase the burden of dollar-denominated debt these entities must repay. According to the Institute of International Finance (IIF), emerging market governments have about $83 billion (approximately 115.37 trillion KRW) in dollar-denominated debt maturing by the end of next year. Coupled with high interest rates and inflation, the strong dollar phenomenon is likely to worsen economic cycles in various countries, leading to a vicious cycle of reduced global trade → growth slowdown concerns → strong dollar as a safe asset.

Central banks worldwide have already entered a reverse currency war to defend their own currencies’ values. This week, besides the Fed, which is expected to raise rates by at least 0.75 percentage points, China (loan prime rate), the United Kingdom, and Japan will also decide on their policy interest rates.

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