- The dollar has risen sharply in 2022, and that’s adding to the pressure on the weakening global economy, the IMF said Tuesday.
- The IMF said the strength of the dollar is likely to slow world trade, given that much of it is invoiced in the currency.
- It’s also making other countries’ dollar-denominated debts more expensive to service, raising the risk of debt crises.
The surge in the dollar is adding to the stresses afflicting the global economy, the International Monetary Fund has said, by slowing world trade and piling pressure on indebted developing countries.
The dollar index, which measures the currency against a basket of its peers, has risen around 16% this year as the Federal Reserve has hiked interest rates faster than other major central banks, drawing investor money back towards the US.
Worries about the global economy have also powered the surge, as the dollar is seen as a safe haven at times of stress.
That’s good news for US consumers, making imports cheaper. But the IMF warned on Tuesday that the strength of the dollar is starting to cause pain around the world.
The basic problem is that the buck is central to the global financial and economic system. Governments and businesses around the world now have to pay more of their domestic currencies to get hold of dollars, adding to their problems just as growth is slowing.
The rally is “likely to have slowed world trade growth, considering the dollar’s dominant role in trade invoicing,” the IMF said in its latest World Economic Outlook update.
It’s also a problem for countries who owe debts denominated in dollars, the IMF said, which have become more expensive to service.
“Such challenges will come at a time when government financial positions in many countries are already stretched, implying less room for fiscal policy support,” the IMF’s report said.
The IMF said 60% of low income countries are in, or are at high risk of, government debt distress, up from about 20% a decade ago.
Sri Lanka earlier this year defaulted on its foreign debts as an economic crisis gripped the country, with a sharp drop in the currency among the government’s numerous problems. Investors have recently become concerned that Pakistan may run into trouble, with its currency also down sharply against the dollar.
The IMF slashed its global growth forecasts for 2022 and 2023 Tuesday, saying it now expects the world economy to expand 3.2% this year and 2.9% the following year.
It said high inflation, driven by surging energy prices following the war in Ukraine, and rising interest rates are set to weigh heavily on growth.
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