When US Interest Rates Rise, the Dollar Strengthens Further... Multiple Maginot Lines Collapse, Japan's Economy Steps Back 30 Years

[Asia Economy New York=Special Correspondent Joselgina, Reporter Jeong Hyeonjin] The ultra-strong US dollar is pushing the global economy into another crisis. The strong dollar, combined with high inflation and high interest rates, is shrinking financial market conditions worldwide and dragging down the value of various national currencies. Emerging markets and global companies with high foreign debt ratios are immediately facing emergencies due to increased repayment burdens. In Japan, where the yen has fallen to its lowest level in 24 years, there are even forecasts that the economic scale could shrink to the level of 30 years ago. The Korean economy, which is highly dependent on external factors, is also not in a safe zone.

◇Broken Currency Maginot Line... Analysis of Japan’s 30-Year Regression

Local media including the daily Wall Street Journal (WSJ) diagnosed the recent dollar strength on the 18th (local time) as a "once-in-a-generation strength." The Dollar Index, which measures the value of the dollar against the currencies of six major countries, closed last week at 109.76. This is a significant rise from the 96 level at the beginning of the year and a clear strength considering that the Dollar Index was below 100 during the 2008 global financial crisis.

The maginot lines of various national currencies are collapsing one after another. Following Europe, where the parity of '1 dollar = 1 euro' was broken earlier, China and Japan have also seen the psychological resistance lines of 7 yuan per dollar and 140 yen per dollar collapse. The won-dollar exchange rate is also threatening the 1,400 won level.

The Chinese yuan recently surpassed the 7 yuan per dollar line. The last time the yuan crossed the 7 yuan per dollar line, known as ‘Po Qi (破七)’, was in July 2020 when US-China tensions intensified. Some market participants expect the yuan exchange rate to rise to 7.2 yuan per dollar this year. Although Chinese foreign exchange authorities took measures such as lowering the foreign currency reserve ratio and reducing the proportion of foreign exchange reserves to prevent a sharp rise in the yuan exchange rate, they could not avoid yuan depreciation.

Even Japan, which has tolerated yen weakness as a policy, is now facing evaluations that the current yen value is unacceptable. Japanese Finance Minister Suzuki Shunichi said he would use all means against yen weakness and left open the possibility of intervening in the foreign exchange market.

The Nihon Keizai Shimbun reported that according to the Organization for Economic Cooperation and Development (OECD), Japan’s nominal GDP this year is 553 trillion yen, which converts to 3.9 trillion dollars based on an exchange rate of 140 yen per dollar. Japan’s nominal GDP falling below 4 trillion dollars is the first time in 30 years since 1992. This means that the Japanese economy converted into dollars has returned to the period just after the collapse of the bubble economy in the 1990s. In 2012, Japan’s nominal GDP exceeded 6 trillion dollars and was 80% larger than Germany’s, but this year it is expected to be almost the same.

◇US, Facing Additional Rate Hikes, Likely to Fuel Strong Dollar

Global high inflation and high interest rates are factors that further fuel this strong dollar. US inflation is at its highest level in 40 years and shows no signs of easing despite the Federal Reserve’s repeated rate hikes. This supports expectations of further tightening and underpins the strong dollar. The market expects the Fed to take at least a giant step (0.75 percentage point rate hike) at this week’s Federal Open Market Committee (FOMC) meeting. Some even suggest the possibility of a 1 percentage point hike.

The problem is that the more the Fed strengthens its tightening policy, the more global funds flock to the safe-haven dollar, intensifying the strong dollar phenomenon. This tightening cycle is also a difference from the strong dollar situations in 2008 and 2020. Additionally, it exacerbates inflation in countries other than the US. Hedge fund Melqart Kill Capital said, "The strong dollar makes it difficult to reduce inflation in Europe," adding, "Because the most important traded goods, such as energy, are priced in dollars."

There is also concern that repayment burdens are increasing for emerging markets and global companies with high foreign debt ratios. Earlier, the World Bank (WB) warned in a report that the global economy is approaching a recession and especially highlighted the possibility of a financial crisis in emerging and developing countries. According to the Institute of International Finance (IIF), emerging market governments’ dollar-denominated debt maturing by the end of next year amounts to 83 billion dollars (about 115.37 trillion won).

If countries intervene more aggressively in the market to defend their currency values in the future, greater turmoil in financial markets is inevitable. WSJ warned in another article that "the strong dollar is likely to trigger a no-winner war of attrition," and emerging countries with limited room for monetary tightening amid economic slowdown warnings will become victims of reverse currency wars. There is also speculation about the possibility of international joint measures to respond to the strong dollar, similar to the 1985 Plaza Accord. Paresh Upadhyaya, head of currency strategy at asset management company Amundi, said, "There could be grounds for joint intervention to lower the dollar’s value."

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