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The Impact of Strong Dollar to The World

D. Atika by D. Atika
3 years ago
in Currency Analysis

Analysts say the strong dollar is making it difficult for both the U.S. and the world as well as emerging markets.

According to an analysis by the Wall Street Journal (WSJ) on the 11th, the strong dollar increases Americans’ purchasing power by making U.S. imports cheaper, but it is also hurting U.S. companies that do business for global customers as well as emerging countries.

The dollar has risen 17% against the pound this year, and has risen to an equivalent level for the first time in 20 years with the euro. The WSJ dollar index has risen about 13% this year.

The dollar is used for international commodity trading as the world key currency. Emerging countries are particularly vulnerable to dollar strength, as they borrow funds from foreign investors and their debts are set at dollars. A strong dollar makes emerging-market currencies less valuable, which makes imports of goods and services in emerging economies more expensive, exacerbating inflation.

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Emerging markets remained resilient even though the dollar rebounded earlier this year. However, this is mainly because raw material prices have risen, which has helped the country’s exports of copper, soybeans and coffee. With commodity prices falling again, global economists are warning that emerging economies could face problems.

U.S. companies operating internationally lowered their earnings guidance, citing the strong dollar. Microsoft was the first company to issue such a warning, and Dear & Co., an agricultural machinery manufacturer, also warned that the strong dollar would burden future profits.

Companies that rely heavily on overseas profits such as Apple, Google, Alphabet, and NVIDIA could suffer stock prices if the dollar continues to strengthen.

The world’s central banks have entered a race to tighten monetary policy to curb inflation. But the strong dollar makes this more complicated.

It is also worrisome that if central banks raise interest rates too quickly, the risk of a slowdown increases. Investors tend to give premiums to countries that are most active in curbing inflation, and that’s why the dollar soared this year due to the Federal Reserve’s aggressive interest rate hike.

D. Atika

D. Atika

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