There have been overwhelming situations in the major currencies when they depreciate against the dollar. Big implications also occur especially for the developing countries or emerging markets. This article focuses on the impacts driven from a strong dollar in the emerging markets. First of all, we need to know the reason why the dollar is appreciating. In a nutshell, the dollar is strong following its strong demand. The recent issues like war in Ukraine, market volatility, historic inflation and rates hikes in the Fed also contribute to the US denominated assets. This would lead to a more demand on dollars.
A strong dollar in an emerging market could lead to debt worries. Poor countries could not borrow in their own currency to meet their desired maturities. Plus, lenders would refuse to assume risk pad back in the borrowers’ volatile currencies. So, these countries tend to seek stronger currencies. Thus, they would borrow in dollars and pay back in dollars without concerning the exchange rate. This particular case could become the reason why the dollar is getting stronger. Because the repayments would be more expensive compared to the domestic currencies.
Basically, a strong dollar could burden the trade. The greenback dominates international transactions, so firms operating in non-dollar economies use it to settle trades. We could also take a look at the crucial commodities like oil that are sold in dollars. However, developing countries would encounter the rise of inflation due to global trade. This is because the strong dollar means the oil imports would be expensive. But although imports would be more expensive, exports would benefit the exporter currencies and improve GDP growth of foreign reserves.
