Strength of US dollar causes global economy to slow even more

The surging dollar is pushing the global economy deeper into a synchronized slump by raising borrowing rates and fueling financial-market volatility – and there is little relief in sight.

A carefully watched barometer of the greenback has surged 7% since January to a two-year high as the Federal Reserve embarks on an aggressive run of interest-rate increases to combat inflation and investors seek safe haven in the face of economic uncertainty.

A rising currency should assist the Fed cool prices and support American demand for overseas goods, but it also threatens to drive up import prices in foreign countries, increasing their inflation rates and draining them of capital.

This is especially concerning for emerging economies, who are being obliged to either let their currencies to deteriorate, intervene to soften the fall or boost their own interest rates in order to maintain their foreign exchange balances.

This month, both India and Malaysia raised interest rates unexpectedly. India also entered the market to support its currency.

The euro has hit a new five-year low in the last week, the Swiss franc has plummeted to parity with the dollar for the first time since 2019, and Hong Kong’s Monetary Authority has been compelled to intervene to maintain its currency peg. The yen has also lately hit a two-decade low.

“The Fed’s rapid pace of rate hikes is causing headaches for many other economies in the world, triggering portfolio outflows and currency weakness,” said Tuuli McCully, head of Asia-Pacific economics at Scotiabank.

While the combination of slower US growth and predicted inflation cooling will eventually cause the dollar’s rise to moderate, relieving pressure on foreign central banks to tighten, finding that new equilibrium may take months.

the surging dollar is pushing the global economy So far, traders are hesitant to name the dollar rally’s apex. This represents bets made towards the end of 2021 that the dollar’s gains would wane since rate hikes were already priced in. Those beliefs have since been debunked.

According to Clay Lowery, executive vice president of the Institute for International Finance and a former US Treasury assistant secretary for international affairs, developing economies are at risk of a “currency mismatch,” which arises when governments, corporations, or financial institutions borrow in US dollars and lend it out in their local currency.

For the latest Business News Follow BOL News on Google News. Read more on Latest Business News on oldsite.bolnews.com