Sounds familiar? A strong dollar is bad news for the rest of the world

The US dollar is the world’s dominant currency and plays a key role in global trade but its dominance means a plethora of problems for other nations, especially the poor countries and emerging markets.

And right now, the Federal Reserve’s determination to crush inflation at home by raising interest rates is inflicting profound pain in other countries — pushing up prices, ballooning the size of debt payments and increasing the risk of a deep recession.

And that’s why this topic is covered by different media outlets. The CNBC in a report quotes Eswar Prasad as saying, “So here’s the paradox. The rest of the world despises how dominant the dollar is, yet they go to the US dollar, because there really isn’t much of an alternative.”

Despite constant predictions of the dollar’s demise, nearly 60 percent of the world’s central banks’ foreign exchange reserves are invested in dollar-denominated assets.

Meanwhile, the share of the US dollar as a payment currency worldwide is more than 40 percent, while it makes up more than 60 percent of international debt and 50 percent of loans globally.

Besides being the go-to currency for international financial transactions, commodities such as oil are also bought and sold in US dollars.

The dollar’s dominance in transactions extends to the US banking system too, which is, in turn, influenced by America’s fiscal and monetary policies.

Prasad, who is an economist at the Brookings Institution and professor at Cornell University, says, “This is ultimately going to entrench the dollar’s dominance even further,” Prasad said. “That is certainly a serious problem for low-income countries that have high levels of foreign debt, especially dollar-denominated debt.”

“For the rest of the world, it’s a no-win situation,” he said a fragile currency can sometimes work as a buffering mechanism, causing nations to import less and export more. But today, many are not seeing the benefits of stronger growth.

But how did the dollar get this status? It was the end of the WWII which led the demise of European power and the rise of the United States as the sole leader of the free world or the free market.

A strong dollar may be a good news back home but is certainly bad for the rest of the world. Being strong and reliable mean more and more people invest in it through bonds and fixed deposits. Like since the Federal Reserves started hiking the interest rates last year, says the CNBC.

But what should the low-income countries do as they not only have to buy food and oil among other things in dollar, thus paying more for these imports but also on the loans and debts they receive? Pakistan is the latest example while the likes of Ghana and Egypt too experienced higher prices.  

While the strong dollar meant 9 percent inflation globally it was 50 percent for Sri Lanka which led of shortage of essential items and unbearable inflation, resulting in civil unrest and change in government.

Thus a strong dollar is inflationary in nature for the rest of the world, especially for the poor countries who have high imports for essential items – like food and energy – low exports due to underdeveloped or less developed industrial base.  

In fact, it reduces the buy power not only of the respective states but also of their citizens. Sounds familiar? Yes1 It is the same thing which we are facing in Pakistan. Hence, Foreign Minister Ishaq Dar is perhaps the strongest advocate of a strong rupee albeit he hadn’t been able to achieve his goal since assuming the office last year due to multiple internal and external factors.

Bu the resentment against a strong dollar isn’t just limited to the poor or developing nations as even the Europe despises it. The open protest led by France against the Biden administration’s decision to give protection and preference to the domestic industries in an example.

Another aspect is that a strong dollar makes Washington to use the world’s dominance currency for geopolitical purposes including sanctions and other retaliatory measures.

But what about the US policymakers? Are they ready to change their priorities as the country’s share in the global GDP is shrinking? No! They still feel that a strong is in the best interests of the US, experts say.

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