The New York Times reported that the US Federal Reserve’s determination to raise interest rates to curb domestic inflation has left the rest of the world suffering — rising prices, higher foreign debt and heightening the risk of a severe recession. Some economists worry that the United States is curbing inflation at home while exporting inflation to the world.
The U.S. dollar is the currency of choice for most of the world’s trade and transactions, and a rate hike by the Federal Reserve would make the dollar appreciate, causing economic turmoil in other countries; in the U.K. and much of the European continent, a surge in the U.S. dollar is fueling local inflation. According to the chart compiled by the financial data company FactSet, the renminbi and Canadian dollar have depreciated by about 6% against the U.S. dollar in the past three months; the Japanese yen has depreciated by nearly 7%, the Swiss franc has depreciated by nearly 4%, the euro has depreciated by about 9%, and the pound has depreciated. about 13%.
In Nigeria and Somalia, where Africa is already facing a famine crisis, a strong dollar is pushing up the import prices of food, fuel and medicine; a stronger dollar has pushed debt-ridden Argentina, Egypt and Kenya into default, and also threatened foreign investment in India and South Korea. investment in emerging markets. Eswar Prasad, an economics professor at Cornell University who has written on currencies, said: “The Fed has no choice but to take more aggressive measures to control inflation, which is doomed for the rest of the world. losing situation.”
The New York Times pointed out that the reason is that the US dollar plays the role of the world’s reserve currency. No matter where multinational companies and financial institutions are, the most commonly used currency for commodity pricing and settlement is the US dollar. Energy and food transactions are mostly denominated in US dollars in the market. The same is true of much of the country’s debt. According to a study by the International Monetary Fund (IMF), about 40% of global transactions are conducted in US dollars.
Higher interest rates ensure better returns, making the dollar more attractive to investors, while reducing their exposure to emerging markets, putting further pressure on the latter. A rising dollar also means that other countries have to pay more to buy basic imported goods such as oil, wheat and medicines or to pay off foreign debts. Just a year ago, $100 worth of oil or foreign debt was equivalent to 1,572 Egyptian pounds and 117,655 won. Today, it is 1,950 Egyptian pounds and 143,158 won. In contrast, American buyers benefited from the appreciation of the dollar. Last year, they paid $16.44 to buy 12 pounds of tea from the United Kingdom. Now they only cost $13.03.
Jason Furman, the chief economic adviser of the Obama administration and now a professor of economics at Harvard University, said that the United States used a strong dollar to curb its own inflation and then exported it to the world, “I can’t remember exactly. When was the last time the U.S. did this?”
Fragile economies are the worst offenders of U.S. export inflation. Poor countries often have no choice but to repay their loans in dollars, and soaring U.S. interest rates were the trigger for Latin America’s disastrous debt crisis in the 1980s. The latest research on the impact of a strong dollar on emerging countries shows that this will bring down the economic development of emerging countries across the board.
Economic experts pointed out that the return of the U.S. dollar to the United States to earn interest when the interest rate is raised will undoubtedly drain the liquidity of the global U.S. dollar. Countries that have lost U.S. dollar funds will have greatly reduced financial support in the domestic capital market. Assets have depreciated significantly, and the release of US dollar funds at this time can easily be purchased by the affected countries, causing local asset bubbles.
At the same time, interest rate hikes around the world have raised concerns that they will be raised too quickly. The World Bank (WB) warned this month that synchronized interest rate hikes are pushing the world into recession and pushing developing countries into a series of financial crises that will cause lasting damage. Globalization of finance and trade has made economies more interdependent than ever, said Maurice Obstfeld, an economist at the University of California, Berkeley, who studies the impact of a strong dollar on emerging markets. “I don’t think the Fed or central banks The ability to act without regard to foreign circumstances.”