Why Strong Dollar Is Dangerous For World Economy?

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What’s happening?

The US dollar has been on a major surge against major global currencies in the past year, recently hitting levels not seen in 20 years.
It has gained 15% against the British pound, 16% against the euro and 23% against the Japanese yen.

The dollar is the world’s reserve currency, which means it is used in most international
As a result, changes in its value have implications for the entire global economy.

Petrol and most commodities such as metals or timber are usually traded in US dollars.
So when the dollar gets stronger, these items cost more in local currency.
For example in Indian Rupee, the cost of $1-worth of petrol has risen over the past year from Rs 72 to Rs 80.
And since the price per litre of petrol in US dollarshas risen steeply as well, it is creating a double whammy.
When energy and raw materials cost more, the prices of many products go up for consumers and businesses, causing inflation around the world.
The only exception is the US, where a stronger dollar makes it cheaper to import consumer products and therefore could help to tame inflation.

Most developing countries owe their debt in US dollars, so many owe much more now than a year ago.
As a result, many will struggle to find an ever increasing amount of local currency to service their debts.
We are already seeing this in Sri Lanka, and other countries may soon follow suit.
They will either have to tax their economies more, issue inflationary local money or simply borrow more.
The results could be deep recession, hyper-inflation, a sovereign debt crisis or all three together, depending on the path chosen.
Developing countries which fall into sovereign debt crises can take years or even decades to recover, causing severe hardship to their people.

Other countries will buy fewer US products as a result of strong dollar.
The US trade deficit, already runs close to a mammoth one trillion dollars per year.
President Joe Biden and Donald Trump before him vowed to reduce it, particularly against China.
Some economists worry that the trade deficit drives up US borrowing and reflects the fact that many manufacturing jobs have moved overseas.

The most obvious economic policy to prevent a trade deficit from growing is the old game of imposing tariffs, quotas or other barriers on imports.
Other countries tend to retaliate against such protectionism, adding their own taxes and other barriers to US products.
In an era when “de-globalisation” has already begun thanks to worsening western relations with Russia and China, a stronger dollar adds to the political momentum for protectionism and threatens global trade.

The stronger dollar is creating pressure for the European Central Bank to raise its own interest rates to prop up the euro and subdue the cost of imports, including energy.
This will put more pressure on eurozone countries with high levels of debt.
Italy, which is the ninth largest economy in the world and has government debts at a whopping 150% of GDP, would be particularly hard to bail out if the situation got out of control.

The dollar has been rising for both economic and geopolitical reasons.
The central bank of the US – the Federal Reserve – has been hiking interest rates aggressively and also reversing its policy of creating money via quantitative easing (QE).
This is with a view to curbing inflation caused by COVID supply issues, the war in Ukraine and also QE.
The other reason for the surging US dollar is because it is a classic safe haven when the world is worried about a recession – and the current geopolitical situation is arguably making it still more appealing.
The euro has suffered from the EU’s proximity to the war in Ukraine, its exposure to Russian energy and the prospect of another eurozone crisis.
It is close to dollar parity for the first time since its early years.

It is difficult to predict the future direction of the US dollar when there are so many moving parts in the world economy.
But that persistent inflation will force US interest rates to keep rising, and that together with geopolitical shocks from war and sovereign debt defaults, it will probably keep the dollar high.
A strong US dollar is a response to troubled times.

Q) Which of the following statement is true?