After winning the presidential election Donald Trump's US dollar has begun to strengthen sharply, but its high value could hit the economies of other countries around the world.
The Economist writes about this.
The strengthening of the US dollar: what are the consequences for the economies of the world
The publication notes that although the value of the dollar is still largely determined by internal events in the US, however its fluctuations almost always cause ripples around the world.
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— One such swing could be coming soon, as the economic policies promised by US President-elect Donald Trump look set to send the dollar soaring. That spells trouble for growth in the rest of the world, the Economist writes.
The Economist acknowledges that it is unclear exactly which parts of his economic programme Trump will be willing and able to implement, though.
However, the jubilation on US stock markets” gives an idea of what investors are expecting. For example, the S&P 500, an index of large American companies, set records one after another on November 6, 7 and 8.
In parallel with this, traders believe that the coming to power of a new administration will boost U.S. corporate profits through tax cuts and deregulation, while government borrowing will rise..
— The combination of a growing deficit and resurgent inflation, in turn, could force the nation's central bank to keep interest rates higher than it would have without Trump. Those higher rates would make dollar securities more attractive, which would be a tailwind for the greenback, the magazine writes.
This scenario is already partially being realized, The Economist points out. On November 7, the US Federal Reserve, as expected, cut its base interest rate by a quarter of a percentage point, lowering the target range to 4.5-4.75%. However, Fed Chairman Jerome Powell left open the possibility that the Fed would keep rates unchanged at its December meeting, rather than continue to cut them.
It is significant that the US rate-setting committee's statement accompanying its decision no longer spoke of “greater confidence that inflation is steadily moving toward 2%”, as was the case in its previous statement in September. The Economist writes that the prospect of higher US interest rates has driven the dollar up 1.5% against various currencies over the past four weeks.
At the same time, the publication points out that the dollar's rise is often accompanied by a weakening global economic outlook.
— One reason for this is that during economic turmoil, investors tend to sell off risky assets and invest in what they perceive as safe dollars and US Treasuries. While a worsening outlook usually leads to a rise in the dollar, a rise in the dollar often worsens the outlook, — the article says.
The magazine recalls an IMF study published in 2023. According to this study, a 10% rise in the value of the dollar reduces output in emerging economies by 1.9% a year later.
— Rich countries are the least affected, but their output still fell by 0.6%. Relief comes slowly: The harmful effects of a strong dollar typically last for two and a half years for emerging economies and for a year for rich countries, according to the study, — the newspaper writes.
In addition, fluctuations in the value of the dollar affect the global economy through two main channels: trade and finance.
— More than 40% of global trade — much of it outside of America — is conducted in dollars. A stronger dollar raises importers' costs, which reduces demand for goods from abroad and reduces overall trade volumes. So in most Asian and Latin American countries, changes in the value of the dollar matter more than the behavior of local currencies, The Economist writes.
The publication points to a 2020 academic study that found that a 1% rise in the dollar against all currencies predicts a 0.6% decline in trade between the rest of the world, after controlling for other factors. According to the Bank for International Settlements, a group of central banks, a stronger dollar also raises costs for buyers of intermediary goods, creating the risk of disruption to long supply chains, The Economist notes.
No less important than the trade implications of a stronger US currency are the financial implications. Thus, for countries and companies that borrow in dollars but have no sources of dollar revenue, a rising dollar mechanically increases their debt burden and raises interest expenses.
— Higher interest rates in America, coupled with a rising dollar, also make investing in the rest of the world less attractive. Capital tends to flee emerging markets, forcing them to raise interest rates as well, tightening monetary conditions just when their economies could be suffering from a general slowdown in trade, — the publication writes.
It is also becoming clear, The Economist writes, that the cost of borrowing outside the US will increase.
— In the early hours of November 6, as the election results became clear, US Treasury yields rose sharply. Yields on Australian, New Zealand and Japanese government bonds also rose. Some of those hikes were reversed in response to the Fed's rate cut, but the respite may prove temporary. Any recovery in yields would be ill-timed, with many central banks trying to support sluggish domestic growth by cutting rates and easing lending, — the paper writes.
However, The Economist concludes that it remains to be seen how long the stronger dollar can hold out.
— Donald Trump himself has long complained that a strong dollar hurts domestic producers and makes American jobs more expensive. But he will have a hard time getting the central bank to cut rates. And as long as rates remain high, the American currency will remain a safe haven for investors and a burning issue for the rest of the world, — writes the publication.
Recall that earlier Fakty ICTV reported that Donald Trump promised in his election campaign to make changes not only in the economy, but also in other areas of US domestic and foreign policy.
