How a strong US dollar is endangering other currencies

Most other major central banks also are forcefully tightening monetary policy to bring down inflation.

How a strong US dollar is endangering other currencies. The dazzling rise of the US dollar, which has hit one record after another, is raising fears of a currency crash of a severity not seen since the 1997 Asian financial crisis reverberated around the world.

The Federal Reserve’s rapid, steep interest rate increases and the relative health of the US economy has caused investors to flood into the dollar, driving the greenback up and sending the British pound, Indian rupee, Egyptian pound and South Korean won, and others to uncharted depths.

“The moves are definitely getting extreme,” said Brad Bechtel of Jefferies, warning that the exchange rates could fall further creating a “dire situation.”

Most other major central banks also are forcefully tightening monetary policy to bring down inflation, but so far the moves have not helped stabilised the currency market, nor has Japan’s direct intervention to support the yen last week.

Many fear that the same will be the case with the Bank of England’s plan announced Wednesday to conduct emergency purchases of government bonds to support the pound.

“We have our doubts that the BoE’s plan will be the silver bullet to kill all of the angst that has been pressuring the pound […] considering its plan doesn’t have permanency,” said Patrick O’Hare of Briefing.com.

Others, especially emerging market countries, are even worse off. The Pakistani rupee has lost 29 percent of its value against the US dollar in the past year, and the Egyptian pound has weakened by 20 percent.

Those countries, and others like Sri Lanka and Bangladesh which “benefitted from cheap and plentiful liquidity,” when interest rates were low during the pandemic, “are all suffering from tighter global liquidity,” said Win Thin, head of currency strategy at BBH Investor Services.

“Those countries with the weakest fundamentals are likely to be tested first but others may join them,” he warned.

Those countries rely on imported oil and grain which have seen prices soar, widening their trade deficits and fueling inflation, massive blows to their currencies.

The appreciation of the US currency has exacerbated the problem, since many commodities are denominated in dollars.

Already in a fragile position, Pakistan was hit with historic flooding in August, which prompted the government to discuss a restructuring of its debt.

“There are severe pressures on the financial system now. And it’s only a matter of time until there’s a larger crisis somewhere in the world,” warns Adam Button of ForexLive.