Numerous economies have to devise ways to bypass or at least mitigate the impact of a rising US Dollar; but it would be quite a task
Global inflation is unrelenting and the ongoing Russia-Ukraine war has been adding fuel to the fire. While there are supply side constraints, the global commodity prices are hitting the roof also because of a stronger US Dollar which is the global benchmarks for undertaking any transaction.
In late April, the US Dollar Index hit a 100 mark for the first time in two years and has remained above this mark for more than a month and a fortnight. The USDX is currently hovering around 104.
The US dollar index or USDX is a measure of the value of the USD as against a basket of other six foreign currencies viz. Euro, Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Swiss Franc (CHF) and Swedish Krona SEK. The USDX was established in 1973 by the US Federal Reserve and is maintained by ICE Data Indices – a subsidiary of the Intercontinental Exchange (ICE).
The euro is the largest contributor to the index, making up almost 58 percent of the basket. It is followed by JPY (13.6 per cent), GBP (11.9 per cent), CAD (9.1 per cent), SEK (4.2 per cent), CHF (3.6 per cent).
A stronger Dollar is not very good news for economies especially for those who rely heavily on imports.
According to a report published by Market Business Insider, at 104, the Index gained by as much as 10 percent in 2022 as on 22 May 2022. Over the last three weeks it has moved both ways but has managed to remain around this. So effectively, the gains have not changed substantially.
The report further estimated that the USD will likely remain strong over the next few months, predicting the greenback to touch 105.
The Dollar has appreciated 11 per cent against the Japanese Yen. Meanwhile, the Indian Rupee has declined 2.5 per cent as on 8 June as per the statement made by the Reserve Bank of India (RBI) Governor Shaktikanta Das in his June Monetary Policy statement spelt on 8th of June 2022.
The INR has been the best performing currency among the emerging economies and has performed better than the currencies of many developed countries including pound, euro, yen and yuan.
This phenomenon happens only when a country’s currency is losing only to the secular dollar strength while holding its strength against other currencies. In case of India, the macroeconomic indicators remain strong with potential to retain the momentum.
An Economic Times report of 21st of May suggests that the Indian Rupee declined by as much as 4.32 per cent against the dollar during this calendar year. From there, it has moved up considerably. India’s massive forex reserves of over USD 600 billion have helped holding the rupee.
In contrast, the rupee advanced up to 6.21 per cent against the other major global currencies, this report said quoting a Bloomberg data. The local unit gained the most against the Japanese yen at 6.21 per cent. The rupee appreciated 3.86 per cent versus the British pound and 2.98 per cent versus the euro, this report further said. The rupee’s rise against the Chinese yuan is 0.68 per cent.
A stronger Dollar, especially at these levels is not a healthy sign as it makes imports of goods and services for rest of the world very expensive. It is not just the loss for other countries but for the US as well.
Because a higher Dollar against other currencies will adversely impact the US exports as there will be less take away of its goods and services. This is a problem which has been pointed out even by many top US companies.
The central banks across the world could only do so much to control USD appreciation.
The US Federal Reserve has been very hawkish undertaking massive rate hikes which will likely be continued over the year. That has led to the exodus of USD from most emerging markets. The demand for dollar has increased amid economic uncertainties leading weakness in all other currencies.
One of the ways that central banks can arrest the decline of their local currencies is by selling Dollars. Central banks do this on and off.
Another way to bypass this is by undertaking non-dollar settlements.
A stronger rupee against other currencies could be helpful for Indian imports and limit the Current Account Deficit (CAD).
Economies have to devise ways to bypass or at least mitigate the impact of a rising Dollar; how they will do it is a task.