Analysts said the strong dollar was causing turmoil in global financial markets, but US officials are unlikely to do anything to stem the rise in the short term as the dollar’s rise helps curb domestic inflation.
The US dollar index has risen about 16% this year as the Federal Reserve aggressively raised interest rates to boost the attractiveness of dollar assets, beating countries around the world as it became more expensive to buy dollar-denominated imports and pay down debt. denominated by a dollar. costs are also higher.
Many developing countries are in a particularly difficult situation because not only do they have heavy debts, but they also depend on imports for most of their fuel, food, etc. Rich countries are also feeling the pinch from rising import costs. As the world’s third-largest economy, Japan has recently intervened to continue its depreciation of the Yen.
The Fed controls US monetary policy, while exchange rate policy is regulated by the Treasury Department. The Secretary of the Treasury, Yellen, has said that the United States supports an exchange rate determined by the market and that the appreciation of the dollar is a product of Fed policy and attracting capital to the United States.
Reasons why the US will not intervene in the short term
Some economists and experts who have worked in the Treasury Department have indicated that the intervention of the Treasury is unlikely to devalue the dollar in the short term, or even to slow the appreciation of the dollar.
First, the Fed is in the process of raising interest rates, and any US intervention in the foreign exchange market will have a limited impact on the dollar. Second, a strong dollar helps keep inflation down, and the Treasury Department does not want to hinder the Fed’s mission.
“The Treasury may also be concerned that the rise of the dollar will lead to resentment from other countries and increased protectionist pressure,” said Mark Sobel, a former Treasury secretary who is now the US president of the Financial and Financial Institutions Forum. Official (OMFIF), and a think tank, but the best strategy for the Treasury in the short term is to try to keep your mouth shut.”
The United States rarely intervenes in currency markets, with the Plaza Accord of 1985 being a well-known exception, when the United Kingdom, along with the United Kingdom, Japan, West Germany, and France, led the dollar depreciated. , the dollar fell over the next decade while the yen rose.
But the intervention occurred that year when the Fed had already started cutting interest rates, and the Treasury Department had room to intervene effectively. In contrast, the Fed is in a period of sharp rate hikes, and the Biden administration has no choice but to accept a strong dollar.
The Vice Chairman of the Fed, Brian Branard, said on Friday that the Fed is closely monitoring the development of the world economy, but in order to prevent inflation, it will raise interest rates enough to limit the economic growth of the United States.
Federal Reserve Bank President Richmond Barkins (Thomas Barkins) admitted on Monday (3rd) that the appreciation of the dollar has spilled over into the global economy, but the Fed’s focus is on the US economy. “There are many things people are worried about, including the risk of contagion from the dollar, but at the end of the day, the Fed’s job is to help the US economy work, so our biggest concern is whether affects the US. economy.”
Consequences of simultaneous rate increases across countries
A stronger dollar will make imports relatively cheap, while US exports will become more expensive and less attractive, limiting economic growth and slowing price increases.
Although the move has hit exporters, the Biden administration wants to see inflation fall, so it has no intention of reversing the dollar’s trend, and the US job market remains strong, dampening the potential blow to the dollar’s appreciation .
But the global problems caused by a rising dollar could accelerate. Central banks may have to raise rates more aggressively than expected to avoid further depreciation of their currencies,If countries raise interest rates together, it will worsen the cooling of the global economy. In the end, more investors flocked to the safe haven of the dollar, which further boosted the dollar and market volatility.
The United Nations Conference on Trade and Development (UNCTAD) warned on Monday that if the US Federal Reserve (Fed) and other central banks continue to raise interest rates, they could push the world into recession and China could have special consequences. of serious
International Monetary Fund (IMF) Managing Director Kristalina Georgieva said on the same day that a global recession can still be avoided if governments’ fiscal policies are coordinated with tighter monetary policies.
