“A strong dollar is affecting growth because it occurs at the same time as high inflation, and that high inflation has to be fought with high interest rates.“, expressed Eduardo Carbajal, professor of Economics and Finance at the Tecnológico de Monterrey, in Mexico.
So, a high dollar, he points out in dialogue with BBC Mundo, “credit is getting more expensivenot just in the United States, but around the world.” That means that when borrowing money is more expensive for countries, companies and individuals, activity slows down and recovery becomes uphill.
As if it were a delicate balance, any movement of the economic gear causes an effect in another part of the system.
more expensive imports
The second effect of a rising dollar is that “drives up the price of imported goodswhich raises your inflation,” explains Elijah Oliveros-Rosen, senior economist at the consulting firm S&P Global Ratings.
And, on the other hand, “it makes the payment of the debt in dollars more expensive”, something that can generate fiscal pressures in countries that have few funds to spend, he points out. With meager fiscal budgets, governments are having to face the scars left by the covid-19 pandemic and the need for social assistance that most Latin American families require, who can hardly resist such high inflation.
At the end of the day, a higher dollar generates less consumption and less investment outside the US, which, added to the strong fluctuations of the financial markets, does not anticipate a very promising path for the coming months.
How much has the dollar strengthened?
In the last year, the dollar has appreciated in relation to 10 other strong currencies in the world by about 12%, while so far this year, the increase has been 7%, according to one of the most used indices to measure the performance of the greenback: the “Bloomberg Dollar Spot Index (BBDXY)”.
This occurs when the US Federal Reserve (FED), which is the equivalent of the central bank, has embarked on a progressive increase in interest rates to curb inflation.
And according to market projections, it will continue to raise them at least throughout this year, while investors keep buying dollars as a way to protect their capital in these times of economic uncertainty. A great challenge that is hitting the advanced economies that have seen a depreciation of currencies such as the euro, the Swiss franc or the pound sterling.
How much have Latin American currencies weakened?
This has also happened in emerging economies, such as Latin America, which have to deal with weakened currencies, raise their own interest rates or intervene to cushion the fall of their banknotes. Comparing the largest economies in the region, between 2021 and so far this yearthe currencies that have devalued the most are those of Argentina -(27%), Chile (-18%) and Colombia (-15%), while the Brazilian real was the only one that appreciated (3.7%) in the same period.
Against this scenario, if inflation does not subside, it is likely that interest rates will continue to rise, experts predict.
And if this is true, the region will have to wait a long time to recover its growth.
Capital outflow?
The same globally. That’s why economists say that we are facing a “stagflation” (or at least just around the corner), which means low growth with high inflation.
Projections from international organizations indicate that it is not unreasonable to think that the US and Europe will enter a recession, that China will slow down sharply and that credit will remain high.
High rates in the US make this market more attractive for investors who do not want to take risks and prefer to take their capital out of emerging economies, a phenomenon that, according to the Institute of International Finance (the world business association of the financial industry) already it’s happening.
(For Cecilia Barría of the BBC News World)
Source: Ambito
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