Troubling upswing

The US Dollar has seen a near-continuous rise since May 2021, growing from 0.82 to almost 1 against the Euro, 0.71 to 0.84 against the Pound Sterling, and 108 to 137 against the Yen. As the primary reserve currency for international trade, the US Dollar holds significant sway over the global monetary system. Central Banks around the world hold huge reserves of it and so do many non-US entities, companies, and individuals. It is overwhelmingly the currency of choice in most international transactions. Many small countries also use the US Dollar as their official currency while the currencies of a number of oil-producing nations like Saudi Arabia and Qatar, among others, are pegged to it.

As the US Dollar surges, items which are traded predominantly in US Dollars get more expensive in local currencies. If the price of a particular commodity has itself grown over the past year, that would only compound its effective expensiveness. Since petrol, a major energy source, and raw materials such as metals and timber, the main input factors for most production processes, are predominantly transacted in US Dollars in international markets, surges in their values feed into almost all economic activities. This results in rampant inflation all over the world. On the other hand, the USA itself enjoys the exceptional privilege of benefitting from this phenomenon, as it becomes easier for it to import with a stronger dollar, thus enabling it to moderate inflation.

As a result of globalisation, many third-world countries opened their markets and created an environment conducive to spontaneous and sustained growth of trade and business. This came at the expense of owing debts — mostly in US Dollars. Over the past two decades, many developing countries have accrued huge amounts of international debt, and a stronger dollar would mean that the value of the debt in local currency is bulging further. Critically swollen debts have already collapsed Sri Lanka's economy, Nepal is precariously teetering at the brink, and several other countries like Pakistan are at risk of tumbling down the same route.

In order to duly service these rising debts, countries could take one of three major courses of action. They could desperately start printing more local currency. Indiscriminately issuing more and more money would inevitably lead to hyperinflation. Alternatively, some countries could respond by hiking taxation in their economy, leading to widespread dissatisfaction and inviting a potential recession. Yet another response to the sovereign debt pileup could be to borrow even more. Done indiscriminately, this tempting, precarious process is a downhill slope to economic doom. Thus, debt crises can send countries down either of the three inescapable funnels of economic collapse, at times successively or simultaneously.

The US itself stands to incur some potential repercussions of its bulking currency. The US Trade Deficit which has already been worsening, will be further deepened by an ascendant dollar. Other nations would be discouraged to purchase US-made items given that every US dollar bites deeper into their pockets. Declining exports and high imports are likely to cause the country to borrow more. With an intimidating currency, the US runs the risk of throwing its own trade into disbalance.

The US is likely to respond to the prospect of growing trade deficit by bringing back the old system of tariffs, imposing import limits, increasing taxation, and enacting other import deterrents. Other countries are likely to respond to USA's unfair measures by building their own defenses. This would become an arms race – a rally of fortifications against competition. Faced with this and other disparities between developed and developing nations, many of the latter might feel that they are being handed the shorter end of the stick in international trade.

Against the prospect of contesting in an unfair market, many developing nations are likely to withdraw from international free trade agreements. Such skepticism is likely to adversely affect international trade and global monetary systems, especially at a time when friction with Russia and China has already punched holes in the fabric of global economic cooperation.

Whereas governments and companies of other countries who cannot muster money in their respective local currencies, are compelled to issue debt denominated in dollars, incurring steep interest rates and default risks, the US Government enjoys the so-described 'exorbitant privilege' of being able to borrow vast sums from global capital markets in dollars issued by the Federal Reserve, at low interest rates and nigh-nil risk of default. As a result, the US can have its way with a lot of global economic levers. This is viewed as an excessive entitlement, a potential disbalancer of international trade, by many. Moreover, as a strengthening dollar would make it increasingly difficult to purchase from the US, protectionism would again be an expected knee-jerk counter-response to this "unfairness" — as perceived by the apprehensive governments of many developing countries. This mistrust could fuel economic nationalism and conservatism in these countries, allowing movements skeptical and critical of globalism to gain traction.

It is likely that the central banks of many other countries would also raise their respective interest rates. However, most of them wouldn't have the resources, stability, and international privileges to be able to pursue it as aggressively and consistently as the US does. Should the dollar continue to surge against the euro, the European Central Bank would hike its interest rates as well. This doesn't bode well for those Eurozone nations which are deep in debt, some beyond their GDPs. Should this happen, countries like Italy, Greece, and Portugal are likely to be left staring down the brink of economic crisis.

Rapid inflation is likely to gnaw away at consumer incomes, leading to a fall in consumption. As consumption declines pervasively, most economic activities would dwindle and growth rates would recede. Protectionism and public debt crises are likely to further shrink the global economy. The shadow of another global recession looms large.

The US Federal Reserve has been vehemently pumping up interest rates and determinedly curtailing quantitative easing with the intention to curb inflation. The resultant decrease in money supply is making the dollar dearer. Overseas investors thus feel tempted to buy the US Dollar in exchange of their weaker local currency, in order to build a sustaining reserve.

Businesspeople and policymakers are looking at the US Dollar as a secure, green pasture in a world and era prone to disruptions and uncertainties in the form of pandemic, wars, and economic collapses. It is sought as a relatively robust and reliable investment, further fueling its worth. The greenback is likely to continue getting stronger owing to unrelenting inflation, geopolitical disruptions, and defaults in servicing public debts. With Europe troubled by the war in Ukraine and the consequent Russian energy quandary as well as the precarity of the Eurozone, Britain still reeling from Brexit and political instability, and Japan's continued inaction in addressing its workforce shortage, the American currency's exceptional dominance is likely to go uncontested. The more the world is plagued by disruptions and crises, the more inclined would it be to seek refuge in the fortitude and security offered by the strong dollar.

The writer is a journalist, columnist, and independent researcher. Views expressed are personal