NEW – September 26, 2022
The strengthening of the dollar is becoming dangerous for the entire global economy — other currencies are falling, and most countries, including the United States itself, are suffering from high commodity prices and inflation. This will lead to the construction of a new economic model in which there will be both winners and losers.
The reason for the growth of the US dollar index against the basket of six currencies of the US’ trading partners, which has already exceeded the levels of 2002, breaking the bar of 112 points, was the monetary policy of the Federal Reserve. Last week, the regulator for the fourth time raised the key rate by 0.75% to 3.0% — 3.25% and said that by the end of the year it expects rates above 4%.
“Interest in the dollar is growing: the US has no problems in the energy sector, such as the EU, and the fight against inflation is progressing more successfully for Americans, and the profitability of dollar instruments is relatively high,” says Nataliya Vashchelyuk, chief analyst at Sovcombank.
At the same time, most experts pointed to the risk of a debt crisis. According to Diana Stepanova, associate Professor of the Department of State and Municipal Finance of Plekhanov Russian University of Economics, developing countries may have serious problems with paying off their dollar debts. Particular risks, in her opinion, lie in the rising cost of refinancing dollar-denominated debt for weak countries.
The collapse of the balance of public debt policy also occurs for developed countries whose public debt exceeds 100% of GDP, and economic growth rates are significantly lower than the rates on public debt.
Vaschelyuk agrees: the US Federal Reserve rate increase increases the risks to the debt sustainability of individual countries if a significant part of loans are denominated in dollars. Rising interest rates also mean an increase in budget spending on servicing the national debt and a decrease in opportunities to stimulate the economy.
Currency crisis risk
The higher the dollar exchange rate, the more distressed the situation of the rest of the countries will be, and as a result it can lead to a large-scale currency crisis, as for example in 1998 it was in Asia, says Yaroslav Ostrovsky, a specialist at the Department of Strategic Studies at Total Research.
According to him, everyone is already suffering: the EU – from record inflation, China – because of constant restrictions and problems in the real estate market, Japan – because of high prices for goods and raw materials, the United States itself — because of a decline in the income of American corporations abroad and a reduction in exports.
Ostrovsky is convinced that when the dollar ceases to be a reliable haven, the way out will be to buy gold, and the world will begin to build a new model of economic interaction.
Winners and losers
The European Union may suffer the most as a result of the strengthening of the dollar, says Artyom Tuzov, Executive Director of the Capital Market Department of IVA Partners IC. He recalled that the euro has weakened against the dollar, and goods exported from the EU have a lower value in dollars, gas for dollars still has to be bought at insane prices. So we can expect another round of inflation in the EU along with a drop in EU GDP.
In his opinion, the EU economy is in some sense “sacrificed” to the current crisis, and the US will be the beneficiary.
But economist Egor Klopenko is convinced that the US will definitely not become beneficiaries: the world is on the verge of a new financial and economic crisis, which may become a record in duration and depth, as it is a consequence of a total imbalance in the global economy and politics. And Russia, according to him, is the only country that will not actually feel the problems associated with this factor.
“I think that when the global economy starts to decline more strongly, we will hear Western proposals on easing sanctions measures, as they are too expensive for them,” Klopenko sums up.
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