The Federal Reserve’s determination to crush inflation at home by raising interest rates is inflicting profound pain in other countries – pushing up prices, ballooning the size of debt payments and increasing the risk of a deep recession.
Those interest rate increases are pumping up the value of the dollar – the go-to currency for much of the world’s trade and transactions – and causing economic turmoil in both rich and poor nations. In Britain and across much of the European continent, the dollar’s acceleration is helping feed stinging inflation.
On Monday, the British pound touched a record low against the dollar as investors balked at a government tax cut and spending plan. And China, which tightly controls its currency, fixed the yuan, also known as the renminbi, at its lowest level in two years while taking steps to manage its decline.
In Nigeria and Somalia, where the risk of starvation already lurks, the strong dollar is pushing up the price of imported food, fuel and medicine. The strong dollar is nudging debt-ridden Argentina, Egypt and Kenya closer to default and threatening to discourage foreign investment in emerging markets like India and South Korea.
“For the rest of the world, it’s a no-win situation,” said Eswar Prasad, an economics professor at Cornell and author of several books on currencies.
At the same time, he said, the Fed has no choice but to act aggressively to control inflation.
“Any delay in action could make things potentially even worse,” Prasad said.
Policy decisions made in Washington frequently reverberate widely. The United States is a superpower with the world’s largest economy and hefty reserves of oil and natural gas. When it comes to global finance and trade, though, its influence is outsize.
That is because the dollar is the world’s reserve currency – the one that multinational corporations and financial institutions, no matter where they are, most often use to price goods and settle accounts. Energy and food tend to be priced in dollars when bought and sold on the world market. So is a lot of the debt owed by developing nations. Roughly 40% of the world’s transactions are done in dollars, whether the United States is involved or not, according to a study done by the International Monetary Fund.
This article originally appeared in The New York Times.
