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The strong dollar is hurting the world economy




As global growth slows and the US economy shows signs of weakness, investors are looking for places where their money will grow.

Emerging markets, such as South Korea, Brazil or India, are risk-takers to invest in, but often grow faster than developed nations such as Germany or the United States. They also tend to be export-driven and often linked to price developments on goods.

But circumstances have changed in the last decade. China is unlikely to be the knight in shining armor this time. The country's economy is also declining, and it is more utilized than it was a decade ago.

It will be difficult for other emerging markets to step in and help avoid a global recession as long as the US dollar remains strong: Emerging economies tend to borrow in dollars. These countries are uniquely vulnerable to a strong greenback, which can make debt more expensive.

A weaker US currency can alleviate this strain and allow new markets to grow faster, perhaps keeping the world out of a global growth recession. The Federal Reserve is gradually lowering interest rates, which could weaken the greenback. But it has not exactly moved with anything urgent so far ̵[ads1]1; certainly not as fast as US President Donald Trump wants.

"Emerging markets may help" save the world "in this downturn, but this requires a weaker US dollar and thus a much more skilled Fed," Hauner said.

Developed countries such as the United States and its European peers are also increasingly concerned that their ultra-low interest rate policy is not actually stimulating growth. Japan has been the most important example of this, and investors are now talking about Japanisation of Europe. The US economy is expanding at a faster pace than its competitors, but growth is still declining.

The Federal Reserve meets next week, and the chances of a further quarter-point cut are above 90%, according to the CME FedWatch Tool. Whether this will be enough to knock dollars remains to be seen. Currencies are often weakened during periods of looser monetary policy.

Complaints about the strength of the US currency have increased this year. From Trump to Democratic presidential candidate Elizabeth Warren, critics say the strong money makes American goods less competitive in the global market.

The frequently cited ICE US Dollar Index, which measures the currency against six rivals, is actually up 1.6% this year. But a look at specific emerging currencies shows another picture.

The dollar is up 1.9% against India's rupee, 4.1% against Brazil's real, and 5.5% against the South Korean won since the start of the year – to a large extent due to the trade war.

Aggravating the case, emerging economies are largely borrowing in dollars, while their largest customers are largely paying in euros, Hauner said. So these countries are also uniquely exposed to the exchange rate in euros. This year, the shared European currency has fallen 3.2% against the greenback.



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