The economic planet |  Reign of the Dollar King

The economic planet | Reign of the Dollar King

It’s a great time to romp in London’s department stores and sample the best restaurants in Paris. Especially if you are American or have pockets full of US dollars.

Posted at 8:00 am

helen barrel

helen barrel

The rise in value of the dollar since the beginning of the year makes the pleasures of big European cities very affordable and Americans are taking advantage of it.

Tourists from the United States are flooding Europe this fall, reports the magazine Forbesto benefit from the most advantageous exchange rate for 20 years.

The euro reached parity with the US dollar last summer for the first time in two decades. Since then it has picked up some feathers, but it is still very low at just over US$1.

Travel to London, Tokyo and just about anywhere in the world has become more attractive to Americans as their currency has appreciated against most other currencies in recent months.

The forex market responds to supply and demand. The US dollar is currently benefiting from two mutually reinforcing factors. First, the dollar is a safe haven that appreciates when economic uncertainty increases. With the war in Ukraine, escalating trade tensions and inflation wiping out consumers’ purchasing power, the global economy is teetering on the brink. And the more anxiety rises, the more the US dollar benefits.

Then the rapid rise in interest rates in the United States to curb inflation makes the US dollar more attractive to investors. According to JP Morgan estimates, investors have withdrawn $70 billion from emerging market bond funds so far in 2022 to redirect them to places where the yield is safer and more attractive.

Therefore, most of the coins are struggling in the current environment. The strength of the dollar is helping to drive inflation around the world as commodities are traded in US dollars and the note is used as currency in international transactions.

The strength of the dollar mainly has the effect of impoverishing the poorest countries, which have no means to stop the fall of their currency and whose debts denominated in American currencies are increasingly expensive.

Some countries are doing better than others. This is the case of Canada, whose currency has weakened, but less than that of the other five G7 countries because the Bank of Canada is waging as fierce a fight as the Federal Reserve against inflation, with interest rate hikes, and the price of oil. , the country’s main export product, remains at high levels.

In other places, it is quite catastrophic. Britain is struggling with a crumbling economy and spiraling inflation. The interest rate hike needed to combat inflation and support its collapsing currency risks deepening a recession that promises to be inevitable.

The sustained rise in the US dollar puts at risk, above all, the economies of the most indebted countries, which do not have the necessary room for maneuver to counteract the fall of their currency. Interest rates are already high and economies are reeling.

The poorest countries can rarely borrow on the markets in their local currency, which is considered too unstable. Therefore, they must borrow in US dollars, and the rising value of the dollar makes repayments more expensive and often impossible. Failure to pay awaits them.

This is what happened in recent history, when the United States raised interest rates to combat inflation. In the early 1980s, a financial crisis hit the South American continent, where most countries were unable to meet their debts.

A decade later, rising interest rates in the United States caused chaos in Mexico, whose economy slumped and inflation soared to more than 30%.

It will be necessary to see if the errors of the past have served for something. Several countries have been able to reduce their dependence on the US currency by borrowing in particular from China.

The International Monetary Fund, however, launched the alert: a quarter of emerging countries and 60% of the poorest countries are in danger. A new debt crisis is looming.

More information

  • 40%
    Proportion of all global transactions made in US dollars

    SOURCE: International Monetary Fund

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