Persistent US inflation – at least partly of President Joe Biden’s own making, thanks to his enormous spending and investment spree in the past three years – means the US central bank, the Federal Reserve, looks set to keep interest rates high for longer.
Rising prices and steep borrowing costs are seriously threatening Biden’s re-election chances – and making a Donald Trump presidency look more likely.
But the blunt weapon of raised interest rates – and the resulting surge in the US dollar – is bad news for the rest of the world, too, threatening higher inflation and rising debt levels.
The US dollar is involved in nearly 90 per cent of all foreign exchange transactions.
A strengthening American currency increases inflation abroad, because other countries need to swap more of their own currencies for the same amount of dollar-denominated goods.
Petrol and many raw materials are traded in US dollars. So when the dollar gets stronger, this also inflates prices in local economies, including the UK.
Other factors relating to the US are causing tremors in world markets.
Conflict in the Middle East, fears over attacks on shipping in the Red Sea and the prospect of another Trump presidency are key concerns. And in uncertain times, investors turn to US dollars, which they see as a safe haven.
Professor Ian Goldin, an expert in global economics at Oxford University, notes that Trump has threatened 100 per cent tariffs on Chinese imports and 10 per charges on European ones. “This could well cause a global financial crisis,” he told i.
Federal Reserve chair Jerome Powell declared on Wednesday: “It is likely to take longer for us to gain confidence that we are on a sustainable path down to 2 per cent inflation. I don’t know how long it will take.”
That means a cut in US rates (currently at 5.25 per cent to 5.5 per cent, a 23-year high) won’t come before the second half of this year at the earliest.
Goldin said: “I think the US dollar is going to stay strong for quite a while. It’s also a reflection of other countries’ weakness.
“There are real doubts about growth in Europe. The continent’s economic motor, Germany, is looking weak. There are concerns about Europe’s energy security. While the US, with shale oil, is now virtually energy independent.”
This situation of stronger US growth and investment, together with high returns on investments in the American currency, has super-charged the US dollar which has grown in strength against most of the world’s currencies.
Every major currency in the world – including the Chinese yuan, the euro and the pound, and two thirds of the roughly 150 currencies tracked by Bloomberg – has fallen this year against the world’s reserve currency. The Japanese yen is now at a 34-year low.
But it is poorer countries like Egypt, Lebanon and Nigeria who are really threatened – by rising debt levels due to the surging US currency. Most developing countries owe their debt in US dollars, so as the value of the dollar rises, countries in the global south have to find larger amounts of local currency to repay it.
In theory, the rest of the world, including developing countries, should at least see the upside of having cheaper exports to sell to the huge American market, as their products fall in price against the US goods.
But even here, America’s economic stranglehold is apparent. As part of Biden’s investment and protectionism programme, called somewhat ironically the Inflation Reduction Act, given the surge in prices it caused, importers face new barriers in the US market.
“The Inflation Reduction Act stipulates there must be special provisions for local producers, so exporters to the US don’t even get the upside of the strong US dollar,” says Goldin.
Some financial analysts think one of the unspoken targets of the American’s strong dollar policy is its leading global adversary China.
Albert Marko and Tony Nash of the geopolitical blog Cloak & Dagger have noted that the falls in the Asian currencies “could disrupt President Xi [Jinping]’s economic recovery plans”, and “could drain liquidity from the Chinese banking system”.
The situation underlines how dominant America and its currency are in the global economy.
Because of Washington’s ability to use the dollar as a weapon and an instrument of foreign policy, some countries, notably Russia and China, are hatching long-term plans to undermine the dollar’s dominance.
But for now, the US dollar is king. And the rest of the world can only observe what happens in Washington – and hope for the best.
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