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It is often said in politics and major crises that if America sneezes, the world will catch a cold. This time the dollar sneezes and the world is infected with more than a cold. The recent turmoil in global financial markets, the rise of the dollar, and the raising of interest rates by central banks in a number of countries to curb inflation, or to defend national currencies, have added to the burdens on people and pressures on governments, as if the world were lacking problems and crises.
Over the past few days, all major currencies witnessed a decline once morest the rising dollar. The British pound reached its weakest level once morest the dollar yesterday, following investors and speculators rejected the British government’s plans to cut taxes and increase the government debt burden. The euro also fell below the level of parity with the US dollar in price, to record yesterday 95 cents, while the Chinese yuan (or renminbi) reached its lowest level. to the Mexican peso, the Tunisian dinar, and the Egyptian or Sudanese pound.
The negative effects were not only in the major countries, but around the world and especially in developing countries, with a few exceptions. The dollar is the preferred reserve currency, the primary currency for most international trade, and 40 percent of transactions in the world take place with it. Therefore, its rise or fall affects many aspects of our lives, from energy prices to the prices of food, medicine and many necessities. Moreover, countries that have external debts, and this applies in particular to the majority of developing and poor countries, find themselves harmed by any rise in the value of the dollar, because it will increase the burden of servicing these debts.
The problem is that this crisis comes at a time when the world is still suffering from the repercussions of the Corona pandemic, the consequences of the war in Ukraine, the effects of climate disasters, and the rise in energy and food prices. So there are real fears that the world is heading towards a period of recession and economic deflation over the next few months. The Organization for Economic Co-operation and Development indicated this week that it expects economic growth to slow in many countries of the world before the end of this year and into the next.
America seems determined to continue its war to curb its inflation with the weapon of raising interest rates, which means more rise in the value of the dollar, and consequently more pressures and economic problems for many countries of the world. The US Federal Reserve announced that it will take more steps following raising the interest rate three times in a row at the highest pace in nearly 40 years, which means that the world has to tighten its belts waiting for more rise in the value of the dollar.
There are economists and politicians arguing today that America, which wants the dollar to reign supreme in global currencies, must shoulder its responsibilities and take into account the repercussions of its financial decisions on the rest of the world. The Federal Reserve focuses on addressing the problems of the American economy, and issues its decisions accordingly, while the impact of its steps is not confined to the interior, but extends to most countries in the world. This is exactly what is happening now as a result of raising US interest rates, which contributed to the confusion of many countries and increased their suffering.
The rising dollar may help America in its efforts to curb inflation internally, because it means lowering import prices for the consumer, but in return it issues more problems and burdens to other countries. While the American consumer buys some goods at lower prices, the consumer in Tunisia, Sudan, Egypt or Lebanon, for example, suffers from the continuous rise in the prices of many goods whose prices change from day to day. These and other countries not only face the problem of high prices of imported goods, but also suffer from a high debt service bill if they have external debts, which is the case for most developing countries.
The irony is that due to the increasing economic pressures, these countries are forced to search for more loans, despite the high borrowing costs, they are forced to do so in order to face the increasing internal burdens. This is happening at a time when several countries have already failed to pay their debt service, which portends a coming hurricane that threatens a new global debt crisis, and bigger problems if the world enters a phase of economic recession as expected. It is not forgotten that the rapid rise in interest rates in America in the 1980s caused the catastrophic debt crisis in Latin America at the time, and the social and political turmoil that followed. Already this month, the World Bank warned that successive increases in interest rates are pushing the world into recession, and developing countries into a series of financial crises.
The truth is that America is not the only one who is now using the interest rate hike to curb inflation, as many countries have recently raised interest rates for this purpose, but the difference is that the impact of the American move is greater because of the accompanying rise in the value of the dollar. It is the American currency, which was traditionally considered a safe haven in times of major crises, that is confusing the world now.
