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The Federal Reserve (FED) has pointed out on several occasions its willingness to contain the rampant inflation prevailing in the United States, however, although Americans may benefit from the reduction in the cost of living, this could stifle the economy of emerging countries.
To control inflation, the FED has to raise the benchmark interest rates at which credit circulates in the economy, in order to limit the supply of dollars and thus control demand.
These interest rate increases make the dollar scarcer in the foreign exchange market, thus raising its value. This rise in the dollar is putting pressure on other economies around the globe.
On Monday, the British pound fell to historic lows, while the euro is now worth less than the dollar, something totally unthinkable a year ago.
In Latin America, practically all currencies have devalued, with the Argentinean, Colombian, Mexican, Chilean and Brazilian real depreciating the fastest.
Some countries such as Nigeria and Somalia are on the verge of famine due to shortages of grain from Ukraine and Russia, in addition to the rising value of the U.S. dollar.
A developed country like Japan intervened the yen to prevent the currency from continuing to depreciate, following a drop in the value of its coin not seen by the Japanese economy in 24 years.
China, with a tightly controlled currency, has chosen to fix the value of the Yuan at its lowest position in the last two years. The Asian giant aims to regain the level of exports it had before the zero-covid-19 policy.
For countries with high levels of dollar debt, such as Argentina, Egypt and Turkey, the revaluation is pushing them into default, threatening to cause a flight of private investment in the economy and forcing governments to make cuts in the provision of public services to the population.
The dollar continues to be the world’s main reserve currency and is used by international trade and multinational companies to fix their prices. According to a study by the International Monetary Fund, up to 40% of all global trade transactions are made in dollars.
The consequences of the dollar revaluation
In its global growth outlook, the Organization for Economic Cooperation and Development (OECD) has predicted that the world economy will slow down in practically all countries, with the exception of China.
Although the outlook for the U.S. economy is not encouraging, it is certainly better than the projections for many emerging economies.
Rising interest rates make holding dollars more profitable for investors, which in turn causes less money to be invested in emerging markets.
Although exports from emerging economies may benefit from having a relatively devalued currency, it also makes imports of capital goods, food, commodities and other products more expensive.
The poorest countries will bear the brunt of this revaluation, as usually all government debts are assumed in dollars, which means that governments will have to allocate more money from their budgets to pay their international debt and less to spend on public spending and social investment.
Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica