Today, the US dollar is enjoying strength that it has not enjoyed in decades, and with its rapid rise, many developed and emerging economies alike are groaning from the pressures they are exposed to as a result of the strength of the dollar, as the echoes of this groaning are heard all over the world.
Last June, the dollar index, which measures the US currency against a basket of 16 currencies, rose 8.7 percent to its best position since 2010. The strength of the dollar prompted investors to withdraw from emerging economies to reinvest their money in the strong dollar.
With this, it can be confirmed that the strength of the dollar did not leave its effects only in emerging economies, as the currencies in developed countries suffered their share of pain and decreased in value against the US dollar.
For example, the pound sterling has lost 20 percent of its value against the dollar since the beginning of the year, and the euro has fallen in some months below parity with the dollar, recording its weakest level since 2002.
While the dollar was able to buy more than seven Chinese yuan for the first time since 2020, the Japanese yen lost about a fifth of its strength against the dollar this year, and at the level of emerging economies the Egyptian pound lost more than 25 percent of its value, and the Hungarian forint fell 20 percent and lost The South African rand is about 9.5 percent of its value against the US currency.
Regarding these declines, James Hannon, a financial analyst at the London Stock Exchange, told The Economist, “The rise in the value of the dollar led to a decline in the emerging currency index by 3.5 percent this year, which is the lowest level in 18 months. However, researching the details will make us realize that the losses are greater than It ranged between 9-15 percent on currencies such as the Polish zloty and the Turkish lira.
Some described the current situation of the strength of the dollar as the United States waging a currency war against the entire world, while some experts considered that the strength of the dollar is a natural result of the US Federal Reserve raising interest rates seven times this year, and that the attraction to the dollar, the master and strongest of currencies, is very natural in light of relative stability. Which the American economy enjoys, amid the difficult international economic conditions that everyone is going through.
While others believe that what is more dangerous than the growing strength of the dollar is that the attempts of policy makers in China, Japan, Europe and in most – if not all – emerging economies have failed to defend their currencies to a large extent in the face of the continuous rise of the dollar.
Professor Adam Westfield, Professor of International Economics at the University of London, comments to Al-Eqtisadiah, saying, “The rise in the value of the dollar threatens to exacerbate slowing growth and exacerbate the problem of inflation for central banks in the world. The role of the dollar as a currency used in global trade and finance means that its fluctuations have wide-ranging effects.”
He added, “However, although the currencies of advanced economies declined against the dollar, their economic structures were not severely damaged, in contrast to the impact of the dollar’s rise in emerging economies. Financial pressures are escalating in countries such as Egypt, Sri Lanka, and Pakistan, all of which have requested aid from the International Monetary Fund. Emerging markets are on the rise and seem unable to contain them.”
The most serious challenge that experts believe that emerging economies will face next year as a result of the appreciation of the dollar lies in how they deal with repayable debts. Emerging market governments have debts worth $83 billion due to be repaid by the end of next year, according to data from the Institute of International Finance, and fulfilling those payments. Debt will probably come at the expense of lower healthcare and education spending.
But L.M. Gabriel, a financial analyst for emerging market economies in a number of British financial institutions, believes that emerging economies are still, despite the growing strength of the dollar against their national currency, able to escape the indebtedness trap so far, but he warns of the future, saying, “The problem facing emerging economies is not the value of the dollar.” Currently, but in the future, if the dollar continues to rise here, disaster will fall, and many emerging economies will not be able to deal with the issue of indebtedness.
The reason for this, in his view, is that emerging markets have exhausted the means they can adopt to attract more dollars.
He added, “Central banks in emerging economies have taken drastic steps to curb the depreciation of their currencies and bonds against the dollar. Argentina, for example, raised interest rates to 75 percent as a way to curb inflation and defend the peso, which has lost nearly 30 percent of its value against the dollar since its inception.” In the year, Ghana also raised interest rates to 22 percent, yet its currency continued to decline, and then most emerging markets will not be able to continue raising interest rates, because that means that businessmen will not be able to work completely and the economy will stagnate.
The problem is that developing economies are not struggling alone to face the decline in the value of their currency against the dollar. The eurozone, which includes 19 European economies, is also suffering as a result of the weakness of the euro against the dollar, at a time when it has not succeeded so far in controlling inflation. And Christine Lagarde, President of the European Central Bank, announced last September and during a meeting of the European Central Bank that the single European currency had lost 12 percent of its value against the dollar this year, amid skepticism that the rise in European interest rates would solve the European economic dilemma represented in interest rates. Inflation and declining European currencies.
The common suffering of emerging and developed economies from the ferocity of the dollar prompts some economists to talk about the need to take action of a global nature to help weaken the dollar despite their conviction that the possibility of taking such a step is currently questionable, but they recall a previous experience in 1985 when the United States launched France, West Germany, the United Kingdom, and Japan launched a joint effort known as the Plaza Accord to devalue the dollar amid fears at the time that the strengthening of the US currency would have a detrimental effect on the global economy.
But why does the United States intervene and cooperate with international efforts to weaken its currency?
The banking consultant, Parish Christopher, believes that the United States, as the leader of the global economy, is aware of the size of the responsibility entrusted to it in ensuring the balance of the international economy.
He says, “If the strong dollar causes severe economic crises for everyone, then everyone may ally together to weaken it in a way that may ultimately lead to a weakening of American centralism in the international economy, and for this reason, Washington can cooperate with emerging and developed economies to rein in the dollar in order to avoid the dire consequences.” .
He adds, “If Washington refuses to cooperate, and the trading partners decide to take revenge by devaluing their national currencies, we will witness a currency war that will not stop at financial losses, but can produce a distorted economic system.”
In fact, the strong dollar began to leave negative imprints on the efforts of central banks around the world in combating inflation, to the extent that prompted China to work to save its national currency from continuing to decline in the face of the dollar by launching more dollar liquidity in the local markets by reducing the amount of reserves that banks need to maintain. Hold them against deposits in foreign currencies.
Nevertheless, experts believe that the US administration’s cooperation with others to control the growing power of the dollar is very important, but the current stage requires special attention to the situation in emerging economies, as it faces 11 emerging markets – Argentina, Chile, Colombia, Egypt, Ghana, Kenya, Tunisia. , Pakistan, Hungary, Romania, and Turkey – some of which have a large population density, the risk of a balance of payments crisis, and if that crisis occurs, it will inevitably result in a strong recession in those markets, and the direct impact on global GDP growth will be “-0.3 percent.”
Seven of these emerging markets, Argentina, Egypt, Ghana, Kenya, Tunisia, Pakistan, and Turkey, have a high risk of sovereign default due to the growing strength of the dollar, which means that the strong dollar has become a weakening factor for many of the United States’ allies. What requires a serious stance from the US administration and the Federal Reserve to solve these problems before it is too late.