According to the International Monetary Fund, the strengthening of the dollar exacerbates the strains ailing the global economy by stifling international trade and exerting pressure on indebted poor nations.
The dollar index, which compares the dollar to a basket of its counterparts, has increased around 16% this year as the Federal Reserve has raised interest rates more quickly than other major central banks, luring investor capital back to the United States.
In times of uncertainty, the dollar is viewed as a safe haven, which has contributed to the dollar’s appreciation.
That’s good news for U.S. consumers, as it makes imports less expensive. However, the IMF cautioned on Tuesday that the strength of the dollar is beginning to wreak havoc worldwide.
The dollar’s central position in the global financial and economic system is the root of the issue. Governments and businesses around the globe must now pay a greater proportion of their home currencies to obtain dollars, exacerbating their issues at a time when development is declining.
The rally is “likely to have slowed world trade growth, considering the dollar’s dominant role in trade invoicing,” the IMF said in its latest World Economic Outlook update.
It is also a concern for countries with dollar-denominated debts, which have become more expensive to service, according to the IMF.
“Such challenges will come at a time when government financial positions in many countries are already stretched, implying less room for fiscal policy support,” the IMF’s report said.
The IMF reported that 60% of low-income nations are in or at high risk of the government debt crisis, up from 20% a decade earlier.
Sri Lanka defaulted on its foreign obligations early this year as an economic crisis overtook the nation, with a dramatic decline in the currency among the government’s various concerns. Recent declines in Pakistan’s currency versus the U.S. dollar have prompted investors to fear that the nation may soon encounter difficulties.
Tuesday, the IMF lowered its global growth projections for 2022 and 2023, stating that it now expects the global economy to increase by 3.2% this year and 2.9% the next year.
It was stated that high inflation, driven by soaring energy prices as a result of the conflict in Ukraine, and rising interest rates will weigh hard on economic growth.
Summary
- Tuesday, the IMF reported that a steep rise in the dollar in 2022 is adding to the strain on the faltering global economy.
- Given that a significant portion of international trade is invoiced in the dollar, the IMF predicts that the dollar’s strength will likely hinder global trade.
- It also makes dollar-denominated debts of other countries more expensive to service, increasing the possibility of debt crises.
