The Strategist

Bloomberg: Stronger dollar makes the global economy fall deeper

05/16/2022 - 09:26

According to Bloomberg, the US Federal Reserve's interest rate hike and the strong dollar are hurting global economic development.

Emerging economies have been particularly vulnerable, partly due to capital flight.

The dramatic rise in the value of the dollar this spring has pushed the global economy even deeper into synchronized recession. This is driving up borrowing costs and causing financial market volatility. The writers claim that there will be no relief in the foreseeable future.

The dollar has strengthened by 7% since January, reaching its highest level in the last two years. The Federal Reserve System of America's strategy, which has conducted a series of aggressive hikes in the key interest rate, is directly tied to such strengthening, according to the agency. These steps were adopted to combat inflation, as well as because investors acquire dollars as a safe haven currency amid global economic turmoil.

The US dollar's strength should aid the Fed in limiting domestic price hikes and boosting demand for foreign-made items in the US. A stronger currency, on the other hand, threatens to drive up import prices in foreign economies, accelerating inflation and capital outflows. This is particularly problematic for developing countries. In truth, they are faced with a difficult decision: either let their national currencies to depreciate or intervene and try to keep it within boundaries. A third option is to support the exchange rate by raising their own key rates.