The US dollar has been on a major surge against major global currencies in the past year, recently hitting levels not seen in 20 years. It has gained 15% against the British pound, 16% against the euro and 23% against the Japanese yen.
The dollar is the world’s reserve currency, which means it is used in most international transactions. As a result, changes in its value have implications for the entire global economy. Below are five of the main ones.
US dollar strength 1977-2022
1. Even more inflation
Petrol and most commodities such as metals or timber are usually traded in US dollars (though with exceptions). So when the dollar gets stronger, these items cost more in local currency. For example in British pounds, the cost of US$100-worth of petrol has risen over the past year from £72 to £84. And since the price per litre of petrol in US dollars has risen steeply as well, it is creating a double whammy.
When energy and raw materials cost more, the prices of many products go up for consumers and businesses, causing inflation around the world. The only exception is the US, where a stronger dollar makes it cheaper to import consumer products and therefore could help to tame inflation.
2. Low-income countries under threat
Most developing countries owe their debt in US dollars, so many owe much more now than a year ago. As a result, many will struggle to find an ever increasing amount of local currency to service their debts.
We are already seeing this in Sri Lanka, and other countries may soon follow suit. They will either have to tax their economies more, issue inflationary local money or simply borrow more. The results could be deep recession, hyper-inflation, a sovereign debt crisis or all three together, depending on the path chosen. Developing countries which fall into sovereign debt crises can take years or even decades to recover, causing severe hardship to their people.
