Strong Dollar Weighs On Globe
Every major currency in the world has fallen against the U.S. dollar this year, an unusually broad shift with the potential for serious consequences across the global economy.
Two-thirds of the roughly 150 currencies tracked by Bloomberg have weakened against the dollar, whose recent strength stems from a shift in expectations about when and by how much the U.S. Federal Reserve may cut its benchmark interest rate, which sits around a 20-year high.
High Fed rates, a response to stubborn inflation, mean that U.S. assets offer better returns than much of the world. In recent months, money has flowed into the United States with a force that is being felt by policymakers from Brussels to Beijing, Toronto to Tokyo.
The dollar index, a way to gauge the general strength of the U.S. currency against a basket of its major trading partners, is hovering at levels last seen in the early 2000s. The yen is at a 34-year low against the U.S. dollar. The euro and Canadian dollar are sagging. The Chinese yuan has shown notable signs of weakness.
“It has never been truer that the Fed is the world’s central bank,” said Jesse Rogers of Moody’s Analytics.
When the dollar strengthens, the effects can be far-reaching. It is on one side of nearly 90 percent of all foreign exchange transactions. A strengthening dollar intensifies inflation abroad, as countries need to swap more of their currency for the same amount of dollar-denominated goods, which include U.S. imports as well as global commodities, like oil, often priced in dollars. Countries that have borrowed in dollars also face higher interest bills.
There can be benefits for some businesses. A strong dollar benefits exporters that sell to the U.S., as Americans
can afford to buy more foreign goods and services.
This year, strong U.S. growth had begun to outweigh worries over stubborn inflation. But if U.S. rates remain high because inflation is sticky even as economic growth slows, then the effects could be more “sinister,” said Kamakshya Trivedi, an analyst at Goldman Sachs.
In that case, policymakers would be stuck between supporting their domestic economies by cutting rates or supporting their currency by keeping them high. “We are at the cusp of that,” Mr. Trivedi said.
The strong dollar’s effects have been felt sharply in Asia. Last month, the finance ministers of Japan, South Korea and the United States met in Washington and pledged to “consult closely on foreign exchange market developments.” They also noted the “serious concerns of Japan and the Republic of Korea about the recent sharp depreciation of the Japanese yen and the Korean won.”
The won is the weakest it has been since 2022, and the country’s central bank governor recently called moves in the currency market “excessive.”
The yen has been tumbling against the dollar, and in late April briefly slipped past 160 yen to the dollar for the first time since 1990. Japan’s central bank began raising interest rates this year after struggling for decades with low growth.
For Japan, that means striking a balance — increase rates, but not by too much in a way that could stifle growth. The risk is that if the yen continues to weaken, investors and consumers may lose confidence in the Japanese economy, shifting more of their money abroad.
A similar risk looms for China, whose economy has been battered by a real estate crisis and sluggish spending at home. The country, which seeks to hold its currency within a tight range, has recently allowed the yuan to weaken, a demonstration of the pressure exerted by the dollar in financial markets.
“A weaker yuan is not a sign of strength,” said Brad Setser, a senior fellow at the Council on Foreign Relations and former U.S. Treasury economist. “It will lead to questions about whether China’s economy is as strong as people thought.”
In Europe, policymakers at the European Central Bank have signaled that they could cut rates in June. But even with inflation improving in the eurozone, there is a concern among some that by lowering interest rates before the Fed, the E.C.B. would widen the difference in interest rates between the eurozone and the United States, further weakening the euro.
Other policymakers are confronting similar complications, with central banks in South Korea and Thailand also considering lowering interest rates.
By contrast, Indonesia’s central bank raised rates in April, in part to support the country’s depreciating currency. Some of the fastest-falling currencies this year, like those in Egypt, Lebanon and Nigeria, reflect domestic challenges made more daunting by the pressure exerted by a stronger dollar.
“We are on the edge of a storm,” Mr. Rogers said.