“Shocked!” If the trend was clear for several weeks, the collapse intensified in recent days and the pound sterling, with a weakness not seen in years, ended up approaching parity with the dollar, so in a Euro is not very strong.
Worse, according to some economists, the Pound sterling (which will not change its royal face before 2024) should continue its big slide in the coming months, and will be worth less than American or European currencies.
For the United Kingdom and its right-wing new Prime Minister, Liz Truss, this is an additional disaster to manage in addition to the collapsed markets (Bloomberg evokes, killer, a fall of 500 billion dollars since entering of this) or in addition to the IMF, but not the most Marxist of the institutions, which officially hit him on the knuckles for an economic program that was considered inefficient and unfair.
The crisis is therefore (already) political, in addition to economic. Because a collapsed pound sterling means, for example, for a country involved in inflation exceeding 10% in July, an increase in energy prices, and this when the crisis is not yet so severe: the circle is fierce and the storm will intensify.
But as explained by the New York Times and Quartz, in particular, the pound is not the only one to weaken against the dollar: the latter reigns supreme in a world of currencies that, or almost all, are in the process of collapsing . . And by practicing a logical policy of raising its key rates to fight the inflationary fire, the Fed and Jerome Powell caused the rest of the world to suffer greatly.
Because although it has experienced a cautious erosion, the dollar remains the reserve currency of choice for the whole world, especially in times of crisis – Covid, war in Ukraine – when its old stability has been also a haven for cautious investors. It is also a currency of exchange: more than 40% of international transactions are made in dollars.
It’s mathematical: if your currency loses value, your purchases in dollars will cost more. However, this is the case in all countries that use the euro (which briefly fell below parity at the end of August), the pound sterling, the Chinese renminbi (also in severe difficulty), the Australian dollar, the Swiss franc , the Korean won. and so on.
Everywhere in the world, everything (or almost) that is imported is more expensive, which rarely compensates for temporarily more profitable exports. As explained by the New York Times, the examples of Somalia or Nigeria, where the prices of basic food are already high, are among the most terrible: a strong dollar can strengthen the big famines there .
A strong dollar also weighs on countries’ debt, if they are denominated in the same currency. A very common case, especially in developing countries: once again, Argentina finds itself on the verge of default, like Egypt or Kenya.
Fed rate hikes causing the dollar to rise should be half of Jay’s questions at the next presser.
The US is spending billions of dollars to support the war effort in Ukraine, while our fiscal policy is crushing Europe and emerging markets. https://t.co/wXy9ohR109 pic.twitter.com/WhGK8Yp3wu
— Claudia Sahm 🇺🇦 (@Claudia_Sahm) September 7, 2022
Patricia Cohen, for the New York Times, provides very numerical examples. “Consider that a year ago $100 worth of oil or debt payments cost 1,572 Egyptian pounds, 117,655 Korean won or 41,244 Nigerian naira, he wrote. Let’s say there is no price rise or inflation. Today, just because of the appreciation of the dollar, this same 100 dollars is worth 1,950 Egyptian pounds, 143,158 Korean won or 43,650 Nigerian naira.”
Of course, the poorest countries and the most vulnerable populations pay the highest price for this American monetary policy, which exports to the rest of the world the inflation it is fighting within.
The risk is social, with demonstrations against high prices, such as in Indonesia or Sri Lanka, which spread quickly. And the risk is chronic. To support their currencies against the dollar, central banks can decide to raise their own rates, as South Africa, Sweden, Argentina, the United Arab Emirates, Brazil have done in recent weeks. , Indonesia, Norway, Switzerland and others.
But higher rates mean slower economies and a greater risk of recession. The World Bank warned this week that the world could enter a global recession in 2023 if countries go in this direction.