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'Bad situation': Rising US dollar is causing problems around the world

2022-10-18 21:39:57Biznes SHKRUAR NGA ASSOCIATED PRESS
'Bad situation': Rising US dollar is causing problems around the world
US dollar

The cost of living in Cairo has risen so much that Mustafa Gamal, who works as a security guard, had to send his wife and one-year-old daughter to live with his parents in a village more than 112 kilometers from the Egyptian capital to save money.

Gamal, 28, now works two jobs, living in an apartment with other young people and cutting meat out of his diet.

"The prices of everything have doubled," he said.

"There was no alternative."

Around the world, people share Mr. Gamal's pain and frustration.

An auto parts dealer in Nairobi, a children's clothes seller in Istanbul and a wine importer in Manchester, England, have the same complaint: a rising US dollar makes their local currencies weaker, contributing to the rise of the prices of everyday goods and services.

This is compounding financial distress at a time when families now face food and energy problems linked to the Russian attack on Ukraine.

"A strong dollar makes an already bad situation worse in the rest of the world," says Eswar Prasad, professor of trade policy at Cornell University.

Many economists worry that the sharp rise in the dollar is increasing the likelihood of a global recession, which could occur within the next year.

The dollar has risen 18% this year and last month hit a 20-year high, according to the index that measures the greenback against several major currencies.

The reasons for the increase in the dollar are unknown.

To combat rising US inflation, the Federal Reserve, as the Central Bank is known, has raised short-term interest rates five times this year and is signaling that more rate hikes are likely. This has led to an increase in interest on US Treasury bonds, thereby attracting investors and increasing the value of the US currency.

Most other currencies are much weaker, especially in poor countries. The Indian rupee has fallen nearly 10% this year against the dollar, the Egyptian currency has fallen 20%, and the Turkish lira has seen a remarkable decline.

60-year-old Celal Kaleli sells clothes and bags in Istanbul.

Because he now needs more 'liras' to buy imported chains and liners, goods that are priced in US dollars, he has to raise prices for Turkish customers. The latter are facing problems to pay it in the local currency which has marked a sharp decline.

"We are looking forward to the new year," he said. "We will review our finances and scale back the business accordingly. There is nothing else we can do."

Even rich countries are not immune. In Europe, which is heading into recession after rising energy prices, one euro is worth less than $1 for the first time in 20 years. The British pound has fallen by 18% compared to a year ago. The pound recently fell to par with the dollar after Britain's new prime minister, Liz Truss, announced major tax cuts that rattled financial markets and led to the departure of her Treasury secretary.

Usually, countries can benefit from falling currencies because it makes their products cheaper and more competitive overseas. But at the moment, any gains from exports are almost negligible, as economies are declining almost everywhere.

The rising dollar is causing pain overseas in several ways:

— Growth makes other countries' imports more expensive, adding to existing inflationary pressures.

— It squeezes companies, consumers and governments that have borrowed in dollars. This is because loan payments now require more local currency to convert to dollars.

— The surge forces central banks in other countries to raise interest rates in an effort to support their currencies and prevent money from leaving the country. But higher interest rates also weaken economic growth and increase unemployment.

Put simply: "The rise of the dollar is bad news for the global economy," says Ariane Curtis of Capital Economics.

"This is one more reason why we expect the global economy to fall into recession next year."

In a Nairobi neighborhood known for repairing cars and selling auto parts, businesses are struggling and customers are unhappy. With the Kenyan shilling falling 6% this year, the cost of imported fuel and spare parts is rising so much that some people are opting to ditch their cars and use public transport instead.

"This is the worst," said Michael Gachie, purchasing manager at Shamas Auto Parts.

"Customers are complaining a lot."

However, the rise of the dollar in 2022 is extremely painful. It is adding to global inflationary pressures at a time when prices have risen. Disruptions to energy and agricultural markets caused by the war in Ukraine add to supply chain problems previously caused by the recession and recovery from the COVID-19 virus pandemic.


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