The strength of the US currency creates global economic and social turmoil
The dollar index exceeded the targets of a top of 110 against the basket of currencies during the first week of this month, to increase the purchasing power of the American citizen, and increase pressure on non-US citizens around the world.
Amid expectations that the US Federal Reserve will continue to raise interest rates as a result of the inflation wave that has not ended yet, the dollar is starting new targets that may reach 115, in a currency war that has begun to take root through Russian-Chinese measures to combat the dominance of the US currency on the global economy.
The rise of the dollar increases the prices of goods and services priced in it, on all countries holding other currencies, and it lowers gold and oil, and creates financing crises for countries that rely heavily on imports. The rise of the dollar brought the euro below par, hit the sterling until it reached a 37-year low, and it rose against the Japanese yen to a 25-year high.
Faced with these repercussions of the rise of the dollar, Russia and China are seeking to establish a new “international order” that does not necessarily depend on the US dollar as the main currency in trade and financial exchanges, as Russian President Vladimir Putin and Chinese President Xi Jinping sought to mobilize Asian leaders to consolidate a new international order, when they met Friday The past, in the framework of a summit aimed at challenging American influence.
Russia is heading to consolidate its economic relations, through bilateral cooperation with countries, which depends mainly on the use of national currencies, to reduce dependence on the dollar, which is getting stronger and higher, which increases pressure on the central banks of emerging countries.
There are trade exchanges between China, the second largest economy in the world, and Russia, one of the largest economies in the world, in national currencies; The Chinese yuan and the Russian ruble, in addition to some European countries that pay the Russian ruble for gas to avoid stopping supplies.
And recently, Turkish President Recep Tayyip Erdogan stated that Turkey will transfer “a quarter” of Russian gas payments to the ruble, and plans to extend the use of the Russian payment system (Mir), to deepen economic relations, after the main Russian financial institutions were excluded from the network of global financial contacts between banks. “Swift”, within the framework of Western sanctions, following Russia’s invasion of Ukraine.
More gains for the dollar
Ricardo Evangelista, senior currency analyst at ActivTrades brokerage, expects more gains for the US dollar, amid the possibility that the US central bank will decide next Wednesday to raise interest rates by a full percentage point, “which predicts further gains for the dollar against the euro.”
Evangelista explains to Asharq Al-Awsat: “The single currency continues to decline against the dollar, despite the European Central Bank raising interest rates by 75 basis points earlier this month, and the growing belief among traders that the same decision will be repeated in October (October). … The situation in Europe is still complicated, especially in light of the continuing energy crisis that does not lead to optimism about the economic future of the region … At the same time, on the other side of the Atlantic, we find the US Federal Reserve committed to its decision to combat inflation, and even increased determination after the release of inflation figures for the month of August, which came higher than expected.”
A new high for the dollar index
Ahmed Moati, CEO of “ViMarkets” in Egypt, believes that “after the dollar index reached the top of 110, we expect it to reach 112 against the basket of currencies, and if it is breached, it will reach 115, as a result of the continuation of the Russian-Ukrainian war, and the continuation of the US Federal Reserve.” in raising interest rates,” referring to the statements of US Federal Reserve Chairman Jerome Powell, regarding prioritizing reducing inflation rates by raising interest rates at the expense of higher economic growth.
Moati explained to Asharq Al-Awsat that more demand for the US dollar, as a result of its continued rise, is withdrawing more dollar liquidity from emerging markets. He said: “The money goes to the dollar … that is, whoever owns other currencies converts them into dollars.”
The scramble for the dollar necessarily leads to “a decline in the currencies of other countries as a result of the lack of demand for them, and thus a decrease in their purchasing value,” referring to the economic and social turmoil that some countries are witnessing as a result of the decline in the value of their currencies such as England and Germany, saying: “We are now experiencing a currency crisis… the dollar.” The strong lead to economic and social turmoil.”
Muati said that the currency war has begun to show its features since the trade war between America and China, which was announced by former US President Donald Trump, “but the rules of the currency war have begun to take root now as a result of expanding the circle of countries that seek to reduce the hegemony of the US dollar,” referring to Russia and China mainly.
However, Maati expected a small impact of these Russian-Chinese steps in the currency war, with the existence of some bilateral agreements between some countries recently to exchange national currencies among themselves, explaining: “As long as the dollar controls the foreign cash reserves of countries, and a barrel of oil is priced in dollars, the dollar will remain He is the king in the currency war, and he is already the king.”
He added, “We need 10 to 20 years to see a collapse of the dollar, if most countries adopt national currencies in their trade exchanges,” noting that the US economy is still able to absorb shocks, and this gives the dollar more impetus.
For his part, market analyst Pierre Verrett indicated that investors continue to flee the stock and debt markets, especially after the recent US inflation report confirmed that the Fed’s strict policies will not stop or even slow down in the foreseeable future.
He said: “Many investors did not fully expect this shift in the positions of the US Federal Reserve and the European Central Bank, as it is difficult to predict how long these policies will continue, with recent economic data confirming medium and long-term threats, and this led to the sharp downward moves in stocks. during the past week.”
The dollar index, which measures the value of the US currency against a basket of six currencies: the euro, the British pound, the Japanese yen, the Chinese yuan and the Swiss franc, fell 0.1 percent during Friday’s trading to 109.68.
The index reached its highest level in two decades, when it recorded 110.79, during the first week of this month, and the index rose 0.6 percent during the past week, and about 15 percent in the current year so far.
The dollar’s rise pushed the Chinese yuan in trading outside the mainland below the 7 level against the dollar, for the first time in more than two years. Similarly, the yuan within the mainland broke through the same barrier shortly after the markets opened on Friday.