A Rising Dollar Is Hurting Other Currencies. Central Banks Are Stepping In. (Published 2022) (2024)

Governments around the world have sought to stabilize their currencies and defend their economies against the Federal Reserve’s rapid interest rate increases, which have tilted the field in favor of the dollar. Their efforts highlight both the interconnected nature of the global financial system and its vulnerabilities.

The Fed has raised rates five times this year and is expected to make further moves as inflation remains high in the United States. The rate increases have lifted the returns on offer to investors buying U.S. assets, drawing money into America and strengthening the dollar. Since the U.S. economy is on firmer footing compared with the rest of the world, investors worried about a global downturn are also pouring money into the world’s largest economy — making the dollar even stronger.

As a result, the currencies of other countries — which are valued in relation to each other — have weakened, upsetting markets in some of the largest economies in the world, from Japan and China to India and Britain.

The Fed “is supercharging the U.S. dollar, curtailing the ability of other global central banks to effectively stabilize their economies,” said Seema Shah, the chief global strategist at Principal Asset Management.

Part of the impact of the Fed’s moves on other regions is economic. A weaker currency means that it costs more for a country to import food, energy and other goods. That adds to domestic inflation, hurts households and could contribute to a global downturn.

The surge in the dollar’s value has also made it harder for foreign borrowers who have debt denominated in U.S. currency to repay their loans. And, as investors have funneled cash away from their own countries and into the United States, the yields on foreign sovereign bonds — which are indicative of the cost of borrowing for foreign governments — have increased.