Source-The post is based on the article “Dollar unrelenting rise spells trouble for global economy” published in Livemint on 19th September 2022.
Syllabus: GS3- Economy
Relevance: Global Economy
News: The article explains the phenomenon of the recent strengthening of the US dollar against other currencies.
The ICE US Dollar Index, which measures the US dollar against the basket of biggest trading partners, has risen more than 14% in 2022.
Other currencies like Euro, Yen and Pound have fallen to their multi-decade low.
What are the reasons behind the recent surge?
The Federal Reserve’s aggressive interest rate hike is responsible for it. It has encouraged investors to pull money from other markets and invest them in US assets.
Inflation in the US is compelling the Federal Reserve to increase the interest rate.
Dismal economic prospects like the Ukraine war around the world are further making a strong case for the Federal Reserve to continue with this policy.
What are the impacts of this surge?
There is increasing financial pressure on emerging markets. Sri Lanka and Pakistan have sought help from IMF. Serbia is also negotiating with IMF.
Emerging markets are already burdened by debt. It was augmented during the pandemic. According to the reports, They have a debt of $83 million in US dollars which is due by next year. The dollar surge will make payback expansive for them.
It is making food and fuel imports priced in US dollars expensive for smaller nations.
Not only emerging markets but Europe is also facing challenges. There is a slide of 12% in Euro this year. It is leading to a historical increase in inflation in Europe.
It is leading to decreased investment in commodities like gold and oil
What steps are being taken to stem this rise?
There are calls for coordinated global action. In 1985, a joint effort called the Plaza accord was launched to weaken the US dollar.
The Bank of China is releasing more dollar liquidity into the market to strengthen the Yuan.