The dollar has hit its highest level in 20 years against some of the world’s strongest currencies.
That means that it is more expensive to buy dollars in countries that use pesos, euros or any other currency other than the greenback. As local currencies depreciate, the price of many imported products, such as electronics, rises.
That the currency of a country depreciates contributes to rising inflation and makes it more expensive to pay debts in dollars contracted by companies or governments, a situation that can generate fiscal pressures in the economies that emptied their coffers to face the pandemic and currently have very little budget.
The DXY index, which measures the value of the US dollar against an average of six other major currencies, including the euro, pound and yen, is up 15% in 2022. By this measure, the dollar is at its lowest point. high in 20 years.
This appreciation of the US currency has hit United KingdomJapan and the Eurozone.
In Latin America, countries like Argentina, Chile and Colombia have suffered sharp devaluations of their currencies this year, while other nations, such as Brazil, Peru or Mexicothey have not seen major turbulence in their foreign exchange market.
The appreciation of the dollar at a global level occurs in the midst of a rapid increase in interest rates; that is, a rise in the cost of credit, a measure that central banks have taken to try to control inflation but, at the same time, puts a brake on economic growth.
Why has it gone up so much?
The US Federal Reserve (Fed), equivalent to the central bank of other countries, has raised interest rates several times this year to try to control the increase in the cost of living.
This has increased the yields offered by financial products that use dollars, such as us government bondsan instrument that allows you to finance yourself.
In these times of international instability following Russia’s invasion of Ukraine in February this year, big investors have recently been buying billions of dollars in US Treasuries as a way to hedge against the tide.
Those bonds are bought in dollars and therefore investors dump other currencies to buy the US currency. This additional demand for dollars causes their value to rise.
On Wall Street there is an appetite to buy Treasury bonds, which causes an additional demand for dollars.
On the other hand, investors also tend to buy dollars when the global economy is under pressure, because the size of the US makes its currency a “safe haven”, which drives its price up.
Another factor working in the greenback’s favor is that the world’s largest economy has been less affected by the energy crisis triggered by the war in Ukraine, compared to many European and Asian economies that are currently struggling.
Less affected than the others does not mean that it has come out of this crisis unscathed. On the contrary, the United States entered at the end of June in a “technical recession”equivalent to two consecutive quarters of economic contraction.
Despite the storm and fears that at some point it will enter a recession with all its letters, companies continue to hire personnel, which is considered a sign of confidence in the direction of the country.
What impact does it have on countries with weaker currencies?
Like the British pound, the Japanese yen has lost 20% in value against the dollar, while the euro has fallen 15% so far this year.
Countries with weaker currencies can benefit from a strong dollar because makes the goods and services they sell to the US cheaperwhich boosts exports.
However, it also means that imported goods from that country become more expensive.
Since oil is priced in US dollars, the value of products such as gasoline and diesel has skyrocketed around the world, becoming the main driver of the wave of inflation that is hitting a large part of the countries.
Governments and large companies in many nations often borrow money in dollars rather than borrow exclusively in their own currencies because it tends to be more stable.
But as the value of the dollar increases, it becomes more expensive to pay those debts with local currency, as Argentina has experienced, a country that has been negotiating its financial commitments with the International Monetary Fund for years and currently has an inflation of 78, 5%.
What are countries doing to mitigate the devaluation of their currencies?
Many countries are trying to increase the value of their own currencies by raising interest rates. The UK, for example, has recently raised the cost of credit by 2 percentage points, while the European Central Bank has raised its interest rate by 1.25 percentage points.
Raising interest rates helps contain rising prices, but also makes it more expensive for businesses and households to borrow money.
A high dollar translates into higher gasoline prices in those countries that are net importers.
This helps keep prices low, but it also means that companies struggling to remain profitable tend to lay off staff or avoid new hires.
And when it is expensive to borrow money, people lower their level of consumption, postponing purchase decisions.
This cycle of high interest rates, lower economic growth, and higher unemploymentmay push countries into recession, something that is keeping European governments awake at night, as they head into boreal winter amid one of the worst energy crises in their history, after Russia shut down the gas tap.
In general terms, it is said that a high dollar is usually bad news for developing countries, although there are always benefits for exporters and people who receive remittances from their relatives who work in the United States or those who save in dollars.
