At a 13-month high, the dollar rose at the end of last week’s trading and the beginning of this week amid global concerns over the policies of US President Donald Trump, who is expected to take over major economies around the world.
On Monday, Trump wrote a post on his Truth Social platform in which he pledged to impose tariffs on Mexico, Canada and China on his first day in the White House scheduled for January 20.
In the face of this type of trade tensions, traders resort to the dollar as a safe haven; and with the increase in demand for it, its value rises against other currencies, especially emerging market currencies.
Despite potential trade tensions between Washington and some of its partners, the consequences of the dollar’s rise affect most global economies, including developing countries.
A report by the Institute of International Finance issued last September shows that the total global debt (individuals, companies and governments) exceeded $310 trillion by the first half of this year.
Despite the debt reaching unprecedented historical levels, the strong dollar, which reached 107.7 points early this week, increases the cost of debt by $100 billion annually for every point above 100 points.
The US dollar is considered the global reserve currency, as it constitutes about 58 percent of the International Monetary Fund's reserves, according to recent data issued by the Fund.
The dollar also constitutes the currency of 80 percent of cross-border trade, and it is also the currency of payments in most countries of the world, in addition to the national currencies issued by the central banks of those countries.
Thus, despite the US currency enjoying an exceptional position in international trade and financial markets, its strength (its rise in value against other currencies) can lead to wide-ranging economic consequences, especially in light of the great disparity between global economies.
** Debt burden
The recent Financial Stability Report issued by the International Monetary Fund showed that one of the most prominent challenges posed by the strong dollar is the increase in the external debt burden of developing countries.
Many countries borrow in US dollars, so the rise in the value of the dollar increases the cost of repaying those debts, because it will force governments to pay more local money to buy the dollar and pay the due installments and interest on those debts.
When the value of the dollar rises and countries are forced to pay more of their local currencies to repay debts, this will eventually lead to the depletion of their reserves of local and foreign currencies.
In addition, a strong dollar increases the burden of debt service, forcing governments to reduce public spending or resort to austerity policies that negatively affect economic growth.
In light of the strong dollar, developing countries become more vulnerable to defaulting on their debts, as happened in some previous crises such as the financial crisis in Argentina and the rise in debt service in Egypt.
** International Trade
In a report by the World Trade Organization last May, it was stated that the strong dollar is one of the most prominent obstacles to the flow of demand for global trade.
The rise in the value of the dollar makes American goods and services more expensive for other countries, which reduces the competitiveness of American exports.
That is, the higher cost of dollar-denominated goods reduces demand for them in global markets, leading to a decline in international trade.
As for countries that rely on dollar-denominated imports, they face higher costs, which leads to a worsening of the trade deficit and increased inflationary pressures.
** Rising inflation
A strong dollar also increases the cost of imports for countries that rely on basic materials such as energy and food.
In countries with weaker currencies, this leads to imported inflation, which raises the cost of living and affects consumers and businesses alike.
Since oil is priced in dollars, a stronger dollar increases the cost of oil for importing countries, which raises fuel and energy prices in general.
** Financial market turmoil
Global financial markets rely heavily on dollar liquidity, so a rise in the value of the dollar leads to major changes in the movement of capital and markets.
Because a stronger dollar prompts investors to shift their money into dollar-denominated assets in search of higher returns, which leads to capital outflows from developing economies and the weakening of their currencies.
A strong dollar also causes sharp fluctuations in foreign exchange markets, increasing uncertainty and discouraging investment; central banks also find it difficult to provide sufficient liquidity in the US currency, which could lead to stress in funding markets.
