As the dollar soars, it spreads the pain globally

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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 his parents in a village 70 miles (112 kilometers) south of the capital. Egyptian to save money.

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

Around the world, people share Gamal’s pain and frustration. An auto parts dealer in Nairobi, Kenya, a baby clothes seller in Istanbul, Turkey, and a wine importer in Manchester, UK, all have the same complaint: a rising US dollar causes their local currencies to weaken, Which helps prices skyrocket. for everyday goods and services.

This is compounding financial difficulties at a time when families are already facing food and energy problems related to the Russian invasion of Ukraine.

“A strong dollar makes the bad situation in the rest of the world worse,” says Eswar Prasad, a professor of trade policy at Cornell University. Many economists worry that the sharp rise in the dollar will increase 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 benchmark ICE US dollar index, which measures the dollar against a basket of key currencies.

The reasons for the rise in the dollar are no mystery. To combat skyrocketing US inflation, the Federal Reserve has raised its benchmark short-term interest rate five times this year and signals more hikes are likely. That has led to higher rates on a wide range of US government and corporate bonds, attracting investors and lifting the US currency.

Most other currencies are much weaker by comparison, especially in poor countries. The Indian rupee has fallen nearly 10 percent this year against the dollar, the Egyptian pound 20 percent and the Turkish lira a staggering 28 percent.

Celal Kaleli, 60, sells baby clothes and diapers in Istanbul. Because he needs more lira to buy imported zippers and linings at dollar prices, he has to raise prices for Turkish customers who struggle to pay him in the much-decreased local currency.

“We are looking forward to the new year,” he says. “We will look at our finances and downsize accordingly. There is nothing more we can do.”

Rich countries are not immune. In Europe, already teetering toward recession amid soaring energy prices, a euro is worth less than $1 for the first time in 20 years, and the British pound has plunged 18 percent since a year ago. .

The pound recently flirted with the dollar peg after new UK Prime Minister Liz Truss announced huge tax cuts that disrupted financial markets and led to the ouster of her Treasury secretary.

‘Bad news’ for the global economy

A rising dollar is causing pain abroad in many ways, including making imports more expensive for countries. [File: Brian Inganga/AP Photo]

Countries could generally get some benefit from falling currencies because it makes their products cheaper and more competitive abroad. But for now, any gains from higher exports are muted because economic growth is fading almost everywhere.

A rising dollar is causing pain abroad in several ways:

  • It makes imports from other countries more expensive, which adds to the existing inflationary pressures.
  • It squeezes companies, consumers and governments that borrow in dollars. This is because more local currency is needed to be converted into dollars when making loan payments.
  • It forces the central banks of other countries to raise interest rates to try to prop up their currencies and prevent money from escaping their borders. But those higher rates also weaken economic growth and increase unemployment.

Simply put, “an appreciating dollar is bad news for the global economy,” says Ariane Curtis of Capital Economics. “It’s another reason why we expect the global economy to enter a recession next year.”

In a Nairobi slum known for repairing cars and selling auto parts, businesses are struggling and customers unhappy. With the Kenyan shilling down 6 percent this year, the cost of imported fuel and spare parts is skyrocketing so much that some people are opting to ditch their cars and take public transport.

“This has been the worst,” says Michael Gachie, purchasing manager for Shamas Auto Parts. “Customers complain a lot.”

2022 is exceptionally painful

A man holds bank notes as he leaves a currency exchange shop in Istanbul, Turkey.
The rise in the US dollar is uniquely painful as it adds to inflationary pressures when prices are already high in the wake of the Ukraine war. [File: Khalil Hamra/AP Photo]

Spinning currencies have caused economic pain around the world many times before. During the Asian financial crisis of the late 1990s, for example, Indonesian companies borrowed heavily in dollars during boom times and were then wiped out when the Indonesian rupiah crashed against the dollar.

A few years earlier, the fall of the peso caused similar pain for Mexican businesses and consumers.

However, the rising dollar in 2022 is exceptionally painful. It adds to global inflationary pressures at a time when prices have already soared. Disruptions in energy and agriculture markets caused by the war in Ukraine magnified supply constraints stemming from the COVID-19 recession and recovery.

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

“What we have to do to earn enough for our daily expenses,” he says. “If before we traveled our routes five times, now we do it six times.”

In the Indian capital, New Delhi, Ravindra Mehta has prospered for decades as a middleman for US exporters of almonds and pistachios. But a record drop in the rupee, in addition to higher raw material and shipping costs, has made walnuts much more expensive for Indian consumers.

In August, India imported 400 containers of almonds, up from 1,250 containers a year earlier, says Mehta.

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

Kingsland Drinks, one of the UK’s largest wine bottlers, was already being squeezed by higher shipping costs for containers, bottles, caps and energy. Now the soaring dollar is driving up the price of the wine he buys from vineyards in the US, and even from Chile and Argentina, which, like many countries, depend on the dollar for world trade.

Kingsland has offset some of its foreign exchange costs by signing contracts to buy dollars at a fixed price. But at some point, “those hedges run out and you have to reflect the reality of a weaker pound sterling against the US dollar,” says Ed Baker, the firm’s CEO.

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

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