The sustained rise in dollar in recent times will have important consequences on the global economy: beyond its comparison with the eurowill feed the inflation and the US trade deficit and will endanger weaker economies.
The dollar has been gaining value this July driven by a convergence of factors such as the volatility of the financial markets, the fear of the inflationthe war in Ukraine, the price of energy and the new coronavirus outbreaks in China, according to analyst Julia-Ambra Verlaine in a report for The Wall Street Journal.
The dollareveryone’s currency
For most countries and investors in the world the dollar it is a safe haven, and for that reason nearly US$7 trillion is held by 149 countries, according to the International Monetary Fund (IMF).
In addition, the dollar It is the main currency used in world trade and is used as a reference for the payment of goods such as wheat or oil, even when they are bought and sold between countries other than the United States.
That means that countries that import a large part of their raw materials, such as Turkey, are negatively affected because they are paying more in their local currency for the same amount as they were a year ago.
“Basically, the currencies of the other countries weaken, which makes everything more expensive for them, which means price increases or inflation. So basically there is this concept that a dollar strongest exports inflation to emerging market countries,” notes Verlaine.
Even for the richest countries of the Old Continent, a dollar strong can be synonymous with more inflationsince through more expensive imports they drive high prices, which is already at record figures in many countries.
However, a dollar strong is good news for people in poorer countries who depend on money sent by family members working in the United States.
The Mexican economy, for example, received 22,412.6 million dollars from its compatriots abroad during the first five months of the year; With more modest figures, remittances in dollars are also vital for a large part of the Central American countries.
Additionally, between January and May 2022, the average individual remittance was $382.
The drawbacks of a dollar strong for the US
That he dollar cost more means that automatically anything made in America is worth more to foreign buyers.
For American companies with big business in the rest of the world, the strength of the dollar it translates into a reduction in their international sales and also makes them less competitive compared to their local rivals.
For that reason, the new price of the dollar has erased billions of dollars from second-quarter sales for US companies, according to its half-year results, prompting many to cut their forecasts for the rest of the year.
This month, IBM warned that strengthening the dollar could cut its revenue this year by $3.5 billion.
For its part, the “streaming” network Netflix estimated that it lost 339 million dollars in sales between April and June due to the strength of the dollar.
Before he dollar reach parity with euroa long list of companies – among others Microsoft, Salesforce and Medtronic – had already warned of the problem that this would imply in their 2022 profits.
“Indirectly you are cooling the market when you have a stronger currency. Some analysts say it’s almost the equivalent of a rate hike. It’s a bit tricky. It’s good, but when it gets too strong it can start to hurt.” Verlaine.
