Presentation: Interregional Strategic Analytics
On September 26, 2022, The New York Times published two reports by Patricia Cohen, titled “A strong dollar… is good for the United States, but bad for the world,” and Jenny Gross, titled: “Why is a weak British pound important?” The two reports deal with the consequences of the US Federal Reserve’s decision to raise interest rates on all countries of the world; Rich and poor alike, while clarifying Washington’s motives for taking such a decision, which extends its negative effects at the international level, and in light of conducting most global financial transactions in dollars, which is a safe haven for countries and individuals alike, especially in times of crisis. The most prominent of them can be reviewed as follows:
According to the two reports, there are a number of gains that accrue to the American economy as a result of raising interest rates, and then strengthening the dollar’s position in the global international economies, which can be stated as follows:
1- The US Federal Reserve’s insistence on raising interest rates despite the consequences: Despite the wide consequences for all countries of the world, the Federal Reserve continued its determination to fight a relentless battle against inflation at home, by raising interest rates, especially since there may be no alternatives to this decision in order to control the growing inflation, amid warnings from economists. that any delay in action could make matters worse, even if such a decision would inflict deep damage on other nations.
2- The dollar reaches its highest levels against other major currencies: Interest rate increases lead to an appreciation of the dollar, the base currency through which most global business transactions are conducted; What causes economic turmoil in both rich and poor countries alike; With the Fed’s decision, the value of the dollar compared to other major currencies, such as the Japanese yen, reached its highest levels in decades, and the value of the euro, used by 19 countries across Europe, tied the value of the dollar, in June 2022, for the first time since 2002 China, which controls its currency tightly, has stabilized the renminbi at its lowest level in two years, while taking steps to manage its decline.
3- The pound sterling recorded a record low against the dollar: In the context of the impact of global currencies, the British pound sterling recorded, on September 26, 2022, a record low for a short period against the dollar, continuing its losses after the new British government announced, on September 23, a comprehensive economic reform focusing on tax cuts and the abolition of restrictions; The British pound fell as low as $1,035, breaking the 1985 record. Although it has bounced slightly from that level, it’s still down about 19% this year against the dollar, and the pound has also fallen against the euro, though not as much.
The fall of the pound raises concerns in Britain; Because a weak currency makes imports more expensive, British companies, many of which depend on materials imported from other countries, may raise prices to compensate for their higher costs; This puts pressure on inflation, which is already close to its highest level in 40 years. While the government’s plans for tax cuts and deregulation are aimed at spurring economic growth, these moves raise the odds that the Bank of England will raise interest rates more aggressively to curb inflation; This makes borrowing more expensive.
4- A more severe impact of negative consequences on poor economies: While the acceleration of the dollar is fueling hyperinflation in most parts of the European continent, the impact is more severe on poor and developing countries already facing the threat of starvation, such as Nigeria and Somalia; A rising dollar is driving up prices for imported food, fuel, and medicine, and a strong dollar is pushing debt-laden Argentina, Egypt, and Kenya close to default, and threatening to discourage foreign investment in emerging markets, such as India and South Korea. New research on the impact of the strong dollar on emerging countries has found that it hinders economic progress across the board.
5- Most international financial transactions are conducted in US dollars: The United States is a superpower with the largest economy in the world, and when it comes to global finance and trade, its influence is huge. This is because the dollar is the world’s main reserve currency, and the currency that multinational corporations and financial institutions often use to price goods and settle accounts, and energy and food prices tend to be priced in dollars when bought and sold in the global market, as well as many debts owed by Developing countries. The result is that nearly 40% of global transactions are conducted in dollars, whether or not the United States is a party to it; This is according to a study conducted by the International Monetary Fund.
6- The dollar is a symbol of stability and security in light of global tension: In a world of anxiety, the dollar has been a traditional symbol of stability and security whenever things go wrong, which has taken on a new dimension with the series of crises that have rocked the world in the recent period, including the coronavirus pandemic, strangling supply chains, the Russian-Ukrainian war, and a series of climate disasters that have disrupted world food and energy supply; More people – not just countries – are converting their savings into dollars. Moreover, the economic outlook in the US, however murky, is still better than the forecasts of most other regions.
7. Higher interest rates make the dollar more attractive to investors. This is because raising interest rates guarantees a better return, which in turn means that investors tend to reduce their activity in emerging markets; This puts more pressure on those economies. In contrast, the unusual sequence of events, which has led to weak global demand, makes matters worse for countries that may be unable to take advantage of the depreciation of the currency to export more of their own goods, which have become cheaper, yet still have to pay More for basic imports like oil, wheat or medicine, as well as outstanding loan bills from billions of dollars in debt.
8. The cumulative effect of raising interest rates in the United States: There is also a cumulative effect of raising US interest rates even in countries where inflation is not high; Central banks feel pressure to raise interest rates to support their currencies and prevent import prices from rising too much; This explains why the countries of Argentina, the Philippines, Brazil, Indonesia, South Africa, the United Arab Emirates, Sweden, Switzerland, Saudi Arabia, Britain and Norway raised interest rates last week.
In conclusion, in light of the above, the World Bank warned, in September 2022, that the simultaneous increases in interest rates are pushing the world towards recession and developing countries towards a series of financial crises that would cause “permanent damage”, but despite the pain caused by the strong dollar. Most economists still argue that the global outcome would be worse if the Fed failed to stem inflation in the US, but financial and business globalization has made economies more interconnected than ever before; This makes the need for closer cooperation between the United States and other countries to solve this dilemma.
- Patricia Cohen, “The Dollar Is Strong. That Is Good for the US but Bad for the World”, The New York TimesSeptember 26, 2022, accessible at: https://www.nytimes.com/2022/09/26/business/economy/us–dollar–global–impact.html
- Jenny Gross, “Why a Weak British Pound Matters”, The New York TimesSeptember 26, 2022, accessible at: https://www.nytimes.com/2022/09/26/business/british-pound-weak.html