By Xin Ping
The dollar's gain is the world's pain, no matter for the Americans or the Africans. With the United States Federal Reserve hiking interest rates at a pace unseen in decades, the greenback hit record highs against other currencies such as the euro and the yen. An overly strong U.S. currency has not only put much pressure on American business, but also dealt a blow to the global economy because of the U.S. dollar's dominant role in cross-border trade. It is quite doubtful whether a trading system dominated by the dollar is in everyone's interest.
The world's pain from the dollar's gain
For almost a year, American manufacturers complained that a strong dollar led to less competitive pricing and foreign exchange loss in transnational trade. According to the financial statement of Apple Inc., this company experienced revenue decline in Q4 of 2022, its very first in four years due to foreign exchange rate fluctuation. In the same quarter, Google's net profit from services fell by 30% year on year. Part of this can be attributed to an overly strong dollar, as corporate profits suffer when goods become more expensive at a time when other countries' currencies are weaker.
The technology-focused Nasdaq index has seen ups and downs since last year, with a near 30% drop at the end of 2022. Many investors considered selling stocks due to the drastic volatility of the stock market. Savings became the preferred option since the banking sector seemed more stable and could offer higher yields as interest rates increased.
However, hardly could anyone imagine that even the bank vault is no longer safe and secure. Deposit cannot guarantee the value of your money any more. The successive bankruptcy of several U.S. banks in the past several months is raising public concern about potential systemic risk in America's financial market and making assets denominated in euros or RMB more attractive.
Things are even worse in Africa and other under-developed regions. Rising interest rates increase debt service burdens and cause growing concerns about debt sustainability, leading to tighter financial conditions for African countries.
For under-developed countries, there are two ways to deal with a strong dollar, but neither is a silver bullet. Central banks could raise interest rates to curb currency depreciation, or use foreign exchange reserves to prop up local currencies against pressure from a strong dollar. The first way could result in downward pressure upon economy growth, possibly sending some countries into recession. The other cannot be sustained in countries without sufficient foreign exchange reserves as a result of the pandemic and expensive imports of necessities. Many countries have to stand and watch their reserves be depleted while inflation gets worse and prices soar.
Nigeria, the biggest economy in Africa, has already been hit hard since last year as inflation rose to 22.04% in March 2023, a record high in more than 17 years. In Ghana, families have to pay two-third more than they used to for necessities. The average household in Sri Lanka has run out of food, fuel, and medicine as they struggle in a crisis. As Maurice Obstfeld, the IMF's former chief economist, has warned, economic turmoil or even recession could break out as the U.S. continues pursuing, without coordination with developing countries, policies that export inflation to trading partners with the overly-strong dollar.
Make it different in the 21st century
Since the U.S. dollar dominates the global trading system, the country that issues this currency has a special responsibility to manage it in a way that takes all the stakeholders' interest into consideration. But judging from what the Fed did in the past several years, the world must have known that this country aims to protect its own interests at the expense of others by exporting domestic inflation abroad. Worse still, some unscrupulous politicians take advantage of the dollar's dominant role to further their geopolitical ambition, weaponizing the dollar and interfering with other countries' domestic affairs. Such hegemonism would ultimately backfire and chip away at the U.S. dollar's prestige in the global trading system. In fact, de-dollarization is underway around the world.
The dollar's share of global foreign exchange reserves has shrunk from 72% in 1999 to 59% in recent years. Countries around the world are rapidly diversifying the currencies in their baskets. In 2023, this trend is accelerating. On Jan. 23, Brazil and Argentina announced that they are starting preparations for a common currency. Jim O'Neill, the former Goldman Sachs economist who coined the "BRICs" acronym short for Brazil, Russia, India and China, argues that "the dollar plays far too dominant a role in global finance," calling for BRICS to include other emerging economies to forge "a more stable, secure, fair multi-currency scenario where other currencies play a bigger role alongside the dollar."
Of course, it is not an easy task. For almost a century, the dollar has been widely used in global trading, consolidating the global dollar system and its dominant role and creating a powerful network with snowballing self-reinforcement. Emerging markets' efforts for de-dollarization might look like taking a thread out of a gigantic, intricate web. But as Brazilian President Lula said at the New Development Bank in Shanghai, "we can do something different in the 21st century." It is the shared desire of the whole world to develop a more stable, secure, multi-currency trading system. Who knows the next thread would not be the last straw?
(The author is a commentator on international affairs, writing regularly for Global Times, China Daily, Xinhua News, CGTN etc. He can be reached at xinping604@gmail.com.)
