Apr 18, 2024 - Economy

How the strong U.S. dollar is rippling through the world economy

U.S. Dollar Index
Data: Yahoo Finance; Chart: Axios Visuals

With the world's finance ministers gathered in Washington this week, one topic is coming up over and over: A surge in the value of the U.S. dollar against most other major currencies is making life complicated for economic policymakers around the world.

Why it matters: The flip side of the stronger dollar is weakening in other major currencies, which tends to fuel inflation in countries that have already been struggling to bring price pressures down.

  • It also makes dollar-denominated debts overseas — especially common in emerging markets — more onerous, essentially throttling economic activity.
  • It creates hard questions in some countries about whether to intervene to prop up their currency in hopes of arresting capital outflows, as Indonesia did this week.

The big picture: The U.S. economy keeps powering forward, showing robust growth in spite of the Federal Reserve rate hikes. That is pushing back the likely timing of Fed interest rate cuts — and thus pushing upward the yields on U.S. treasury securities and other financial assets.

  • The Fed's newly hawkish tone is in contrast to many of its counterparts, notably including the European Central Bank, which appears locked in on cutting rates in June.
  • Meanwhile, the fundamentals driving U.S. growth, including large-scale investment in manufacturing capacity and the presence of superstar tech companies, mean global investors see strong potential returns in dollar assets, further tilting the playing field toward the greenback.

By the numbers: The dollar index, which measures the dollar against six major advanced economy currencies, is up 5% from its recent low on Dec. 27.

  • Many Asian nations have seen even bigger swings. The South Korean won is down 6.1% against the dollar so far this year, for example.
  • According to calculations by Bloomberg, the Taiwanese dollar this week has been at its lowest level against the dollar in eight years, the Malaysian ringgit reached a 26-year low and the Indian rupee reached an all-time low despite strong domestic growth.

What they're saying: In an event Wednesday at the Council on Foreign Relations in Washington ECB president Christine Lagarde was asked about the divergence between the euro and the dollar (the euro is down 3.7% so far this year).

  • "So, the scripted answer I should give you is the European Central Bank does not target exchange rates," she said. "But," she added, followed by a long, dramatic pause. "But obviously we look at it very carefully," she said, receiving chuckles from the audience.
  • It is obvious, she said, that "movement of currencies may have an impact on inflation by way of imported inflation."
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