[Economics] Why the unstoppable rise of the dollar is bad for the world economy (and how it affects Latin America)

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That greenback strength has combined with rising interest rates in the United States to hamper growth.

In one year the dollar has appreciated 12% against the world's strongest currencies. FALSE IMAGES

 

A high dollar against many of the world's major currencies contributes to the economic downturn.

That greenback strength has combined with rising interest rates in the United States to hamper growth.

They are not the cause of the current economic hardship, but they are adding fuel to the fire, when the world faces historic levels of rising costs of living and much uncertainty due to the war in Ukraine.

Experts say the rising dollar is contributing to a "synchronous slowdown" in the pace of economic activity in different parts of the world.

"A strong dollar is lowering growth because it occurs at the same time as high inflation, and that high inflation has to be combated with high interest rates," says Eduardo Carbajal, professor of Economics and Finance at the Tecnológico de Monterrey, in Mexico. .

 

So, a high dollar, he points out in dialogue with BBC Mundo, "is making credit more expensive, not only in the United States, but also throughout the world."

That means that when borrowing money is more expensive for countries, companies and people, activity slows down and recovery becomes uphill.

As if it were a delicate balance, any movement of the economic gear causes an effect in another part of the system.

more expensive imports
The second effect of an increase in the dollar is that "it raises the price of imported products, which increases inflation," explains Elijah Oliveros-Rosen, senior economist at the consulting firm S&P Global Ratings.

 

A high dollar makes credit and the value of imported products more expensive. FALSE IMAGES
And, on the other hand, "it makes the payment of the debt in dollars more expensive", something that can generate fiscal pressures in countries that have few funds to spend, he points out.

With meager fiscal budgets, governments are having to face the scars left by the covid-19 pandemic and the need for social assistance that most Latin American families require, who can hardly resist such high inflation.

In the end, a higher dollar generates less consumption and less investment outside the US, which, added to the strong fluctuations in the financial markets, does not anticipate a very promising path for the coming months.

How much has the dollar strengthened?
In the last year, the dollar has appreciated in relation to 10 other strong currencies in the world by about 12%, while so far this year, the increase has been 7%, according to one of the most used indices to measure the performance of the greenback: the “Bloomberg Dollar Spot Index (BBDXY)”.

 

This occurs when the US Federal Reserve (FED), which is the equivalent of the central bank, has embarked on a progressive increase in interest rates to curb inflation.

And according to market projections, they will continue to rise at least throughout this year, while investors continue to buy dollars as a way to protect their capital in these times of economic uncertainty.

 

A great challenge that is hitting the advanced economies that have seen a depreciation of currencies such as the euro, the Swiss franc or the pound sterling.

How much have Latin American currencies weakened?
This has also happened in emerging economies, such as Latin America, which have to deal with weakened currencies, raise their own interest rates or intervene to cushion the fall of their banknotes.

Comparing the largest economies in the region, between 2021 and so far this year, the currencies that have devalued the most are those of Argentina -(27%), Chile (-18%) and Colombia (-15%), while that the Brazilian real was the only one that appreciated (3.7%) in the same period.

Against this scenario, if inflation does not subside, it is likely that interest rates will continue to rise, experts predict.

 

The Argentine and Chilean currencies are the ones that have devalued the most between 2021 and so far in 2022 in Latin America.

 

And if this is true, the region will have to wait a long time to recover its growth.

Capital outflow?
The same globally. That's why economists say that we are facing “stagflation” (or at least it is just around the corner), which means low growth with high inflation.

The projections of international organizations indicate that it is not unreasonable to think that the US and Europe will enter a recession, that China will slow down sharply and that credit will remain high.

High rates in the US make this market more attractive for investors who do not want to take risks and prefer to take their capital out of emerging economies, a phenomenon that, according to the Institute of International Finance (the world business association of the financial industry) already it's happening

 

Link: https://www.eluniverso.com/noticias/economia/por-que-el-imparable-ascenso-del-dolar-es-malo-para-la-economia-mundial-y-como-afecta-a-america-latina-nota/