Dollar Danger: US Currency Threatens to Destabilize Global Economy
On Friday, the US dollar rose to a 13-year high against a basket of major world currencies on expectations of a hike in interest rates and growth in budgetary spending under President-elect Trump. Russian financial experts are concerned that the strong US currency threatens to destabilize the global economy.
The dollar index, a measure of the value of the US dollar relative to a basket of foreign currencies, hit 101.48, its highest level since April 2003, on Friday, Reuters reported, noting that the currency had risen over 4% in the last two weeks, following a steady climb through most of this year.
According to finance analyst and Expert.ru contributor Anna Koroleva, while the strong dollar may seem like an indication of the revival of the US economy, the reality is that “such a meteoric rise of its currency could undermine economic growth in the US,” and poses a threat to the world economy as well.
Last week, Joachim Fels, global economic advisor for Pimco, a private investment management firm controlling over $1.5 trillion in assets, told Reuters that both the US and emerging markets would be negatively affected by a dollar that’s too strong.
“And there are other problems,” Koroleva explained. “A strong dollar and rising Treasury yields makes it significantly more expensive for non-financial borrowers outside the US to service dollar-denominated debt,” whose total amount is nearing $20 trillion. “Dollar-denominated loans and investments may be affected too, and on a global scale. Emerging markets, which depend on foreign capital and are vulnerable to capital outflow, will also face pressures,” she said.
Speaking to Expert.ru, Irina Rogova, financial analyst for Forex Club Group of Companies, confirmed that an expensive dollar means that foreign countries servicing debt denominated in the US currency will have to spend considerably more to do so, which has a negative impact on most global economies.
Rogova stressed that the strong dollar also harms the US’s ability to service and pay off its own massive debt, given that it would be easier for the country to pay if inflation were higher.
At the same time, she said, “if we take into account that most commodities are denominated in dollars, growth of the currency will have a negative impact on the cost of raw materials and therefore, the economies of countries including Australia, New Zealand, Canada and Russia.”
Still, according to Alpari Group senior analyst Anna Bodrova, the continued rise of the dollar makes sense from the standpoint of market trends, “beginning with the Federal Reserve’s intent to increase lending costs and ending with Trump’s plans to concentrate production in the US.”
Ultimately, Bodrova stressed, “like it or not, support for the national currency comes first and foremost from within. Additionally, the ‘hot money’ [yield-sensitive capital] which had previously worked in the economies of developing countries is now returning home to the United States. This is evident by interest in 10-year bonds.” At some point in the future, the strength of the dollar will have a negative impact on US debt. But for now, “the trend of appreciation in the currency’s value looks logical.”
Soruce – Sputnik News