Dollar’s Resurgence Is a Headache for the Rest of the World

Surging Treasury yields help send the U.S. currency to its best quarter in a year

By Chelsey Dulaney of The WSJ. Excerpts:

"The greenback on Monday reached its highest level of the year, bringing its gain since mid-July to 6.6%."

"The dollar’s strength has been driven by surging Treasury yields. The 10-year U.S. Treasury yield reached a new 16-year high Monday of 4.682%."

"Any big currency move produces both winners and losers. In the U.S., a strong dollar is politically popular and largely good for consumers because it holds down inflation by keeping import prices in check, and makes trips abroad cheaper.

For the rest of the world, however, the return of the strong dollar is a largely unwelcome development. In many countries, interest rates are at their highest in years or decades, already increasing the risk of financial stress. The combination of those higher rates, a stronger U.S. currency and elevated oil prices spells lower growth across the world and more financial vulnerability. 

U.S. companies with big overseas businesses like Apple are also getting hit as the value of their overseas revenue falls in terms of the U.S. currency and their goods become more expensive for foreigners."

"The greenback is still by far the most widely used currency for global trade and finance, which means its fluctuations ripple far outside of the U.S. Commodities, like oil or wheat, are usually priced in dollars. And governments, companies and households around the world have borrowed trillions of dollars in the U.S. currency. When the dollar’s value rises, it gets more expensive for others to buy imports or repay their debts."

"In recent months, currencies in Latin America and Eastern Europe have been hit hard. Central banks in Brazil, Poland and Hungary have started cutting policy rates after winning praise for their quick action to tighten monetary policy in 2021, well ahead of the Fed and other developed-market central banks. They are now under pressure to pause or slow rate-cutting plans to prevent further pressure on their currencies."

"A paper co-written by Obstfeld last year showed how the shock of a sharp rise in the dollar leads to yearslong economic underperformance in less developed economies. Consumption, output, investment and government spending all come under pressure alongside the local currency."

"The euro, which topped $1.10 over the summer, has fallen back toward $1.05 as the eurozone economy stagnates and worries over debt sustainability in fragile southern economies like Italy re-emerge."

Related posts:

Why Is The Dollar Down 5.6% This Year? (2017)

Why Did The Value Of The Dollar Rise More Than 20% From July 2014 To March 2015? (2017)

The weakening dollar is having rippling effects around the world (2017)

Higher U.S. interest rates recently helped fuel a surprise rally in the dollar  (2018)