DOLLARS -GOVERNMENTS'- DOLDRUMS : PRECIS

 

Bankers abroad try to counter dollar's rise. All and every government's efforts seek to stabilize currencies as the US Fed raises its rates.

Governments around the world have sought to stabilize their currencies and defend their economies against the Federal Reserves rapid interest rate increases, which have tilted the field in favor of the dollar.

Their effort highlights both the interconnected nature of the global financial system and its vulnerabilities.

The Fed has raised rates five times this year and is expected to make further moves as inflation remains high in the United States. The rate increases have lifted the returns on offer to investors buying U.S. assets, drawing money into America and strengthening the dollar.

And because the U.S. economy is on a firmer footing than the rest of the world, investors worried about a global downturn are also pouring money into the world's largest economy - making the dollar even stronger.

 As a result, the currencies of other countries - which are valued in relation to each other have weakened, upsetting markets in some of the largest economies in the world, including Britain, China, India and Japan.

The Fed is supercharging the U.S.dollar, curtailing the ability of other global central banks to effectively stabilize their economies,'' said Seema Shah, the chief global strategist at Principal Asset Management.

Part of the impact of the Fed's move on other regions is economic. A weaker currency means that it costs more for a country to import food, energy and other goods.That adds to domestic inflation, hurts households and could contribute to a global downturn.

The surge in the dollar's value has also made it harder for foreign borrowers who have debt denominated in the U.S. currency to repay their loans.

And as investors have funneled cash away from their own countries and into the United States, the yields on foreign sovereign bonds - which are indicative of the cost of borrowing for foreign governments have increased.

But there is another issue troubling investors and policy makers. Global markets are connected, with prices for assets around the world linked to one another.

And so rising U.S. interest rates have prompted sharp shifts in global currencies, bonds and equities, causing markets to react suddenly and simultaneously.

The World Students Society thanks Joe Rennison and Jeanna Smialek.