The Global Implications of a Rising US Dollar

There are a lot of great things to be said about the United States economy right now. As US markets celebrate their longest ever growth streak, economically, a lot of Americans are satisfied with their financial well-being. Unemployment fell to a 50-year low, falling from 3.9 to 3.7 percent in September, as the US economy added another 134,000 jobs and companies have been steadily announcing payroll increases. In the third quarter, wages grew 3.4 percent, the fastest pace in over a decade. Amazon shocked the country by announcing its new $15 minimum wage for US workers, a policy that will go into effect next month, and is yet another sign of the best labor market in over a decade.

In the midst of this positive growth, the US Dollar continues to perform well as we enter the fourth quarter. US treasury yields are their highest since 2011, the dollar hit an 11-month high against the yen, and even the pound slipped to below $1.30 as the Dollar continues to sneak up. This means many Americans will enter the holiday season not only more eager to spend, but perhaps more eager to travel, as the Dollar’s value continues to rise globally. While spelling great news for US citizens, what does this mean for others around the world? Specifically, emerging markets across the globe are very aware of the recent trend of the Dollar, and in many cases, are facing potentially severe implications if the rapid growth continues to be a trend.

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Currency exchange rate sign in downtown Buenos Aires, Argentina, where the Argentine peso has fell significantly in 2018.

One key indicator of economic and monetary prosperity is the Federal Reserve benchmark interest rate. The Fed tends to raise rates during a strong economy to contain excesses and make sure the economy continues to grow stably, and tends to lower rates in times of economic struggle, in an effort to boost spending and borrowing. Currently sitting at a range between 2% and 2.25%, the Fed raised the rate for the third time in late September, and plans to raise it again sometime in December, and the plans don’t stop there. In June, when the Fed laid out its long-term objectives, it tentatively planned three more interest rate increases for 2019, and one more for 2020. The rates can also help ensure inflation rates are steady. The current inflation rate of 1.9% is very close to the Fed’s target of 2%. This is a very significant outline, as it tells us that the Fed predicts the US’s growth to continue through 2020.

 While signaling stability for the US Dollar, the Fed’s interest rate increases can negatively affect foreign markets, especially those who have borrowed heavily in US Dollars. As it stands, the US is still, by far, the dominant global reserve currency, accounting for 63% of global reserves. Many countries around the world issue Dollar-denominated debt, and debt levels become exaggerated with the rise of the Dollar. While interest rate increases work in strong economies such as the US’s, the same increases constrain countries where economies are not doing as well. It hurts policy options in regions with tight financial conditions and high trade tensions. While the US market enjoys a growth streak, the markets of emerging countries have on average been declining throughout 2018.

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The Indian Rupee hit an all-time low this year vs. the US Dollar.

Emerging markets, which often rely heavily on foreign investment, will be hurting the most. In emerging Asian markets, the Indonesian rupiah hit a 20 year low in 2018, and the Indian Rupee hit an all-time low vs the Dollar, hitting 73.77. In South America, the Argentine Peso, which was placed at 18 vs the US Dollar in 2017 and was relatively stable, rose to over 40 in 2018. The Brazilian Real hit 4.15 this year, while being in the low 3s during 2017. In the Middle East, the Turkish Lira, which has been in the 3s for the last half decade, has reached above 6, and in Africa, the South African Rand has increased to over 15 despite being as low as just 11 last year. While these are some of the more extreme examples worldwide, and while there are plenty of other internal issues at play, it still marks a global trend of struggle against the US Dollar. The reality is, foreign investors are crucial to the success of emerging economies, and investors become more and more reluctant to invest abroad in times of such volatility.

This brings up an intriguing ethical debate, that is, should we, as Americans, really care about the economic struggles abroad? After all, with turbulence abroad, investors have turned to the relative stability and strength of the US markets, increasing investment in 2018. With our government’s “America First” policy, jobs have finally been increasing again over the past few years. Despite this, I worry about the tough implications that emerging economies are facing right now. Worldwide market collaboration and investment drives innovation and success and can move different people and cultures together forward Of course, the reality is a lot more complicated, but I still see success, especially in emerging markets, as a positive thing, and it is important to keep in mind that US markets affect these markets more than we think.

 

 

Sources:

https://www.cnbc.com/2018/08/31/argentina-peso-sell-off-stops-as-investors-await-governmnet-plan.html

https://www.thenational.ae/business/economy/us-dollar-here-to-stay-as-main-reserve-currency-says-moody-s-1.770003

https://www.thenational.ae/business/money/us-dollar-takes-centre-stage-in-the-financial-universe-1.728368

https://www.indiatimes.com/news/india/indian-rupee-is-not-alone-here-are-5-worst-performing-currencies-in-the-world-352157.html

https://www.wsj.com/articles/the-tricky-part-of-the-feds-next-rate-increase-1536831001

https://www.businessinsider.com/how-the-fed-raises-interest-rates-2017-12

https://www.ft.com/content/bcfa7bf0-b4a1-11e8-bbc3-ccd7de085ffe

https://www.scmp.com/comment/insight-opinion/united-states/article/2167616/how-stronger-us-dollar-and-higher-crude-prices

https://www.theguardian.com/business/2018/oct/04/soaring-us-dollar-threatens-trouble-for-emerging-markets

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