09

The US Dollar has seen a near-continuous rise since May

2021, growing from 0.82 to almost 1 against the Euro,

0.71 to 0.84 against the Pound Sterling, and 108 to 137 against

the Yen. As the primary reserve currency for international

trade, the US Dollar holds significant sway over the global

monetary system. Central banks around the world hold huge

reserves of it and so do many non-US entities, companies, and

individuals. It is overwhelmingly the currency of choice in

most international transactions. It is also the standard currency

in most global commodity markets. Many small countries also

use the US Dollar as their official currency while the currencies

of several oil-producing nations like Saudi Arabia and Qatar,

among others, are pegged to it. Thus, sharp rises and falls in its

value translate to economic consequences worldwide.

As the US Dollar surges, items which are traded predominantly

in US Dollar get more expensive in local currencies. In order

to get, say USD 1000-worth of a certain metal (which is traded

internationally in USD), one would have to pay a significantly

higher number of pounds in the UK compared to the previous

year. If the price of that commodity has itself grown over

the past year, that would only compound to its effective

expensiveness. Since petrol, a major energy source, and raw

materials such as metals and timber, the main input factors

for most production processes, are predominantly transacted

in US Dollar in international markets, surges in their values

feed into almost all economic activities. This results in

rampant inflation all over the world. On the other hand, the

US itself enjoys the exceptional privilege of benefitting from

this phenomenon, as it becomes easier for it to import with a

stronger dollar, thus enabling it to moderate inflation.

As a result of globalisation, owing to encouragement from

developed nations as well as international bodies like IMF

and the World Bank, many third-world countries opened

their markets and created an environment conducive to

spontaneous and sustained growth of trade and business.

This came at the expense of owing debts and most of

these debts are owed in US Dollars, it being the dominant

currency of international monetary systems. Over the past

two decades, many developing countries have accrued huge

amounts of international debt and a stronger dollar would

mean that the value of the debt in local currency is bulging

further. Critically swollen debts have already collapsed

Sri Lanka’s economy, Nepal is precariously teetering at the brink, and several other countries like Pakistan are at risk of

tumbling down the same route.

In order to duly service these rising debts, countries could take

one of three major courses of action. They could desperately

start printing more local currency. Indiscriminately issuing

more and more money would inevitably lead to a hyperinflation

crisis. Alternatively, some countries could respond by

hiking taxation in their economy, leading to widespread

dissatisfaction and inviting a potential recession. Yet another

response to the sovereign debt pileup could be to borrow

even more. Done indiscriminately, this tempting, precarious

process is a downhill slope to economic doom. The course of

developing, small nations borrowing from developed countries

and then borrowing further to service the same debts in hopes

of returning it all back in brighter days can quickly turn to debt

traps. Incidences of countries falling into these vicious cycles

have become increasingly frequent.

The US itself stands to incur some potential repercussions

of its bulking currency. The US trade deficit which has

already been worsening, will be further deepened by an

ascendant dollar. Other nations would be discouraged to purchase US-made items given that every US dollar bites

deeper into their pockets. As many emerging economies

in Asia become manufacturing powerhouses, US exports

(relative to its GDP) are dipping. Declining exports and high

imports are likely to cause the country to borrow more. With

an intimidating currency, the US runs the risk of throwing its

own trade into disbalance.

The US is likely to respond to the prospect of growing trade

deficits by bringing back the old system of tariffs, imposing

import limits, increasing taxation, and enacting other import

deterrents. Other countries are likely to respond to the US’s

unfair measures protecting its home industry by building their

own defenses. This would become an arms race – a rally of

fortifications against competition. Faced with this and other

disparities between developed and developing nations, many

of the latter might feel that they are being handed the shorter

end of the stick in international trade. Protectionist measures

enacted by the US would seem particularly hypocritical as it is

usually the developing countries that are chastised by the West

and international bodies for having tariffs in place and asked

to lift such trade barriers.

Faced with the prospect of contesting in an unfair market,

many developing nations are likely to withdraw from

international free trade agreements. Reconsidering opening to

globalist-capitalism in the first place, many could then decide

to turn inwards in economic matters and ensconce their home

industries in a fortification of trade barriers in a bid to become

self-reliant. Such skepticism is likely to adversely affect

international trade and global monetary systems. Developing

countries are likely to perceive the global economic playfield

as an uneven one, leading to deterioration in the smoothness

and streamlining of international commerce, even potential

disruptions in certain functions.

Whereas governments and companies of other countries who

cannot muster money in their respective local currencies, are

compelled to issue debt denominated in dollars, incurring

steep interest rates and default risks, the US government

enjoys the so-described ‘exorbitant privilege’ of being able to

borrow vast sums from global capital markets in dollars issued

by its central bank, the Federal Reserve, at low interest rates

and nigh-nil risk of default. As a result, the US can have its

way with a lot of global economic levers. This is viewed as an

excessive entitlement, a potential disbalancer of international

trade. Being able to control the dollar, the world’s currency,

empowers the US to potentially influence global monetary

systems and possibly unjustly incline critical parametric

balances in its favour. Moreover, as a strengthening dollar

would make it increasingly difficult to purchase from the US,

protectionism would again be an expected knee-jerk counter-

response to this perceived unfairness by the apprehensive

governments of many developing countries. This mistrust

could also fuel economic nationalism and conservatism in

these countries, allowing movements skeptical and critical of globalism to gain traction. Certain political parties could

leverage this to serve ideological ends, mobilizing public

sentiment against economic liberalism by demonising foreign

investors, firms, traders, and governments, blaming them for

the economic injustice and crisis.

It is likely that the central banks of many other countries

would also raise their respective interest rates. However,

most of them would not have the resources, stability, and

international privileges to be able to pursue it as aggressively

and consistently as the US. Should the dollar continue to surge

against the Euro, the European Central Bank would hike its

interest rates as well. This would not bode well for those

Eurozone nations which are deep in debt, some beyond their

GDPs. Should this happen soon, countries like Italy, Greece,

and Portugal are likely to be left staring down the brink of

economic crisis, necessitating tough bailouts.

Rapid inflation is likely to gnaw away at consumer

incomes, leading to a fall in consumption. As consumption

declines pervasively, most economic activities would

dwindle and growth rates would recede. Protectionism

and public debt crises are likely to further shrink the

global economy. The shadow of another global recession

looms large over the future.

The US Federal Reserve, the country’s central bank, has

been vehemently pumping up interest rates and determinedly

curtailing quantitative easing with the intention to curb

inflation by making borrowing difficult in the country. It is

looking to systematically tighten its ginormous balance

sheet which got distended because of its policy of money

injection through bond purchases during the pandemic. The

resultant decrease in money supply is making the dollar

dearer. Overseas investors thus feel tempted to buy the US

Dollar in exchange of their weaker local currency, in order

to build a sustaining reserve, perceiving the American

currency as having lasting high value.

Business people and policymakers are looking at the US

Dollar as a secure, green pasture in a world and era prone

to disruptions and uncertainties as the pandemic, wars,

and economy collapses. It is sought as a relatively robust

and reliable investment, further fueling its worth. The

greenback is likely to continue getting stronger owing to

unrelenting inflation, geopolitical disruptions, and defaults

in servicing public debts. With Europe troubled by the

war in Ukraine and the consequent Russian energy

quandary as well as the precarity of the Eurozone,

Britain still reeling from Brexit and political instability,

and Japan’s continued inaction in addressing its

workforce shortage, the American currency’s exceptional

dominance is likely to go uncontested. The more the world

is plagued by disruptions and crises, the more inclined

would it be to seek refuge in the fortitude and security

offered by the strong dollar.