As the dollar soars, it spreads pain globally

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A rising US dollar weakens local currencies and fuels skyrocketing prices for everyday goods and services.

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The cost of living in Cairo has skyrocketed so much that security guard Mustafa Gamal had to send his wife and one-year-old daughter to live with their parents in a village 70 miles (112 km) south of the Egyptian capital to save money.

Gamal, 28, stayed behind, working two jobs, sharing an apartment with other young people, and eliminating meat from his diet. “The prices of everything have doubled,” he says. “There was no alternative.”

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All over the world, people share Gamal’s pain and disappointment. An auto parts dealer in Nairobi, Kenya, a children’s clothing retailer in Istanbul, Turkey, and a wine importer in Manchester, UK all complain about the same thing: a rising US dollar weakens their local currency, fueling prices to soar. for everyday goods and services.

This exacerbates financial hardship at a time when families are already facing food and energy shortages associated with Russia’s invasion of Ukraine.

“A strong dollar exacerbates a bad situation in the rest of the world,” says Eswar Prasad, professor of trade policy at Cornell University. Many economists fear that a sharp rise in the dollar increases the likelihood of a global recession next year.

The dollar is up 18 percent this year and hit a 20-year high last month, according to the ICE US dollar benchmark, which measures the dollar against a basket of major currencies.

The reasons for the growth of the dollar are not a secret. To combat rising inflation in the US, the Federal Reserve has raised its benchmark short-term interest rate five times this year and is signaling more hikes are likely. This led to higher rates on a wide range of US government and corporate bonds, attracting investors and raising the value of the US currency.

Most other currencies are much weaker in comparison, especially in poor countries. The Indian rupee is down nearly 10 percent against the dollar this year, the Egyptian pound down 20 percent and the Turkish lira an astounding 28 percent.

Celal Kaleli, 60, sells baby clothes and diaper bags in Istanbul. Because he needs more lira to buy dollar-priced imported zippers and linings, he has to raise prices for Turkish buyers who can barely pay him in the heavily depreciated local currency.

“We are looking forward to the new year,” he says. “We will examine our finances and reduce staff accordingly. There’s nothing more we can do.”

Rich countries are not protected. In Europe, which was already teetering on the path to recession amid soaring energy prices, one euro is worth less than $1 for the first time in 20 years, and the British pound sterling is down 18 percent from a year ago.

The pound recently flirted with dollar parity after new British Prime Minister Liz Truss announced a massive tax cut that roiled financial markets and led to the removal of her finance minister.

“Bad news” for the global economy

A rising dollar hurts abroad in many ways, including making it more expensive for countries to import. [File: Brian Inganga/AP Photo]

Usually, countries can benefit to some extent from a depreciating currency because it makes their products cheaper and more competitive abroad. But for now, any gains from increased exports are muted because economic growth is halting almost everywhere.

The rise of the dollar causes problems abroad for several reasons:

  • This makes imports from other countries more expensive, exacerbating existing inflationary pressures.
  • This compresses companies, consumers and governments that have borrowed in dollars. This is because more local currency is required to convert to dollars when repaying a loan.
  • This forces the central banks of other countries to raise interest rates to try to support their currencies and keep money from leaving their borders. But these higher rates also dampen economic growth and increase unemployment.

Simply put, “a stronger dollar is bad news for the global economy,” says Arian Curtis of Capital Economics. “This is another reason why we expect the global economy to fall into recession next year.”

In Nairobi’s sandy area, famous for auto repair and auto parts sales, businesses are struggling and customers are unhappy. The Kenyan shilling has fallen 6 percent this year, and the cost of fuel and imported parts has skyrocketed to the point where some people are choosing to abandon their cars and use public transport.

“That was the worst,” says Michael Gaci, purchasing manager for Shamas Auto Parts. “Customers complain a lot.”

2022 is uniquely painful

A man holds banknotes at the exit of a foreign exchange office in Istanbul, Turkey.
The US dollar’s soaring is clearly painful as it adds to inflationary pressures when prices are already high due to the war in Ukraine. [File: Khalil Hamra/AP Photo]

Floating currencies have caused economic pain around the world many times over. For example, during the Asian financial crisis of the late 1990s, Indonesian companies took out large dollar-denominated loans during boom times and then went bankrupt when the Indonesian rupiah collapsed against the dollar.

A few years earlier, the sharp fall in the peso had caused similar pain to Mexican businesses and consumers.

However, the dollar’s ​​meteoric rise in 2022 is unequivocally painful. This adds to global inflationary pressures at a time when prices are already skyrocketing. Disruptions to energy and agricultural markets caused by the war in Ukraine exacerbated supply constraints associated with the recession and recovery due to COVID-19.

In Manila, Raymond Manaog, 29, who drives a colorful Filipino minibus known as a jeepney, complains that inflation – and especially rising diesel prices – is forcing him to work harder to survive.

“What should we do to earn enough for our daily expenses,” he says. “If we used to drive our routes five times, now we do it six times.”

In the Indian capital of New Delhi, Ravindra Mehta flourished for decades as a broker for US exporters of almonds and pistachios. But the record drop in the rupee — on top of higher raw material and shipping costs — has made nuts much more expensive for Indian consumers.

India imported 400 containers of almonds in August, compared with 1,250 containers a year earlier, Mehta said.

“If a consumer doesn’t buy, it affects the entire supply chain, including people like me,” he says.

Kingsland Drinks, one of the largest bottled wine producers in the United Kingdom, has already been hit by higher shipping costs for containers, bottles, caps and energy. Now the dollar’s skyrocketing price is pushing up the price of wine bought from vineyards in the US and even in Chile and Argentina, which, like many other countries, rely on the dollar for world trade.

Kingsland offset part of its foreign exchange costs by entering into contracts to buy dollars at a fixed price. But at some point, “those hedging vehicles run out and you have to deal with the reality of a weaker pound against the US dollar,” says Ed Baker, the company’s managing director.

Translation: Soon customers will simply have to pay more for their wine.

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