Open Now
Open Now
Watch now

'The US dollar has reached a 20-year high, posing a threat to world economic and financial stability."

The quick rise in the value of the US dollar, according to economist Mohamed El-Erian, poses 'hazards.'

Higher import prices for already overburdened developing countries are among the hazards to the global economy posed by the US dollar's rise to 20-year highs, according to renowned economist Mohamed El-Erian.

El-op-ed Erian's in the Financial Times focused on dollar strength, as the US Dollar Index has lately soared above 104, a level not seen in two decades. The index gained about 10% for 2022 past week before slightly reversing its gains.

On paper, dollar appreciation could promote global economic adjustments by boosting exports of weaker countries while cutting import costs in the United States, according to Allianz's chief economic counselor.

"However, in the current environment, a quick rise in the dollar poses risks to both the health of an already shaky global economy and unsettled financial markets," he warned.

According to El-Erian, the implications are especially severe for underdeveloped countries, which are already dealing with difficulties ranging from energy to food and debt.

"Dollar appreciation means higher import prices, higher external debt servicing costs, and a heightened danger of financial instability for the majority of them. It adds to the strain on countries already strained by the fight against COVID's ravages in terms of resources and policy responses."

Persistent dollar gain can exacerbate what El-Erian refers to as the "small fires everywhere syndrome," in which several country cases of economic and financial instability merge into a deadly mix of slowed global development, debt defaults, and social, political, and geopolitical unrest.

"The spillovers to advanced economies could be more problematic than any direct impact of dollar appreciation on them," he said. "A destabilized developing world can add volatility to financial markets that are already grappling with many threats, in addition to hurting the external growth engines of such nations at a time of rising stagflation at home."

The performance of the US dollar against the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc is tracked by the US Dollar index. Expectations that the Federal Reserve will raise interest rates more aggressively than other central banks in advanced nations, outperformance by the US economy that attracts capital, and the relative refuge attractiveness of US financial markets, according to El-Erian.

He believes that the best approach to mitigate the risks of the dollar growing too quickly is for the rest of the world to accelerate structural changes that, among other things, boost returns on capital and strengthen economic resilience.


Follow us on Google News

Filed under