The sustained rise in the dollar in the last times will have important consequences in the letter eglobal economy– beyond its comparison with the eurowill feed the inflation and the deficit US trade and will endanger weaker economies.
The dollar has been gaining value this July driven by a convergence of factors such as financial market volatility, inflation fears, the war in Ukraine, energy prices and the new coronavirus outbreaks in China, according to analyst Julia-Ambra Verlaine in a report for The Wall Street Journal.
THE DOLLAR, EVERYONE’S CURRENCY
For most countries and investors in the world, the dollar is a safe haven, and for that reason almost 7 trillion US dollars are in the hands of 149 countries, according to the International Monetary Fund (IMF). In addition, the dollar 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 that are not the United States.
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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 stronger dollar exports inflation to emerging market countries,” Verlaine says.
Even for the richest countries of the Old Continent, a strong dollar can be synonymous with more inflation, since through more expensive imports they drive high prices, which is already at record levels in many countries.
Still, a strong dollar is good news for people in poorer countries who rely on money sent home from 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 DISADVANTAGES OF A STRONG DOLLAR FOR THE US
That the dollar costs more means that automatically everything that is made in the United States is worth more to foreign buyers.
For US companies with large businesses in the rest of the world, the strength of the dollar translates into a reduction in their international sales and, in addition, makes them less competitive compared to their local rivals.
For that reason, the new price of the dollar has erased billions of dollars from US companies’ second-quarter sales, according to their half-year results, prompting many to cut their forecasts for the rest of the year.
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This month, IBM warned that a strengthening 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 the dollar reached parity against the euro, a 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 is almost the equivalent of a rate hike. It’s a little complicated. It’s good, but when it gets too strong, it can start to be harmful,” Verlaine concludes.
