Indranil Banerjie | Dollar's rise sets off crisis of collapsing currencies

A currency storm is wreaking havoc across the globe. This unprecedented tumult has sent the mightiest currencies crashing in recent months, sending shockwaves across markets worldwide, hiking prices of critical commodities like oil and foodgrains to bruising levels, and raising fears of a rash of debt defaults. Economies may tumble and the global economy could well descend into a period of deep recession.

Currencies of even the mightiest economies are falling, some precipitously. The worst-hit includes Asian nations whose economies show no signs of structural weakness.

The Japanese yen, for instance, hit a recent low of 150 to the US dollar in late October. This is a 32-year low and has happened despite the Bank of Japan, the nation’s central bank, spending $37 billion in late October in addition to the $18 billion or so in September to prop up the yen. Between January and November 2022, the yen has declined by as much as 28 per cent.

Even the mighty Chinese currency has been battered, falling 15 per cent this year to 7.25 yuan (offshore) per US dollar by end October, which is its lowest rate since January 2008, the time of the global financial crisis. China’s central bank has been selling billions of dollars to stabilise its currency. Much of the dollars have been procured in the forward market, which the Chinese have been selling in the spot market.

The British pound has fallen by 17.7 per cent, the Turkish lira by a whopping 39 per cent, the euro by about 15 per cent, the Australian dollar by about the same amount and the Taiwanese currency by almost 16 per cent. Virtually all Asian currencies have been hit: India by 10.9 per cent, Bangladesh 17.9 per cent, Pakistan 23.7 per cent, South Korea 19.2 per cent, Indonesia 10.02 per cent, Malaysia 13.3 per cent, Philippines 13.9 per cent and Thailand by 13.7 per cent.
Forex predictions suggest that the downward pressure on world currencies will not ease in the coming months.

The emerging economies have been clobbered by the rising dollar, particularly those that have high external debt and large import requirements. Since most of world trade is priced in dollars, everything is more expensive now, including food and fuel, the most basic commodities. This is triggering massive disaffection and, in some places, street protests.

Falling currency values will greatly exacerbate the already perilous condition of millions around the world, especially the hungry. NGOs warn that more than 19,000 people are dying of hunger every day and this figure is only rising.

The most at risk are those countries that have large debt servicing burdens. The International Monetary Fund says as many as 60 emerging economies of Africa, Asia and South America are facing debt-distress, plunging currency values, and falling foreign exchange reserves. In many cases, their condition has been exacerbated by heavy borrowings from China, which has proved reluctant to roll over debt or ease repayment terms.

Sri Lanka was the first casualty. Once considered a thriving prosperous country, Sri Lanka defaulted on its foreign debt earlier this year, precipitating a mass revolt caused by surging inflation, massive devaluation and the collapse of external trade. Its economy is expected to contract by 8.7 per cent in 2022.
Other nations are also feeling the heat, includes Pakistan, Bangladesh, the Maldives and Laos. All these countries, and others, have rushed to multilateral financial institutions, primarily the IMF, for urgent assistance and in most cases have got it but with significant political costs.

Rising prices have affected not just the emerging economies but the developed ones as well. This year has seen street protests against rising living costs in Romania, pay hike demands across France, railway strikes in Britain, the German pilots’ strike and Czech demonstrations against rising energy costs.
An IMF forecast released in mid-November predicts a gloomy outlook for the world economy, saying manufacturing and services “signalled weakness in most Group of 20 major economies, with economic activity set to contract while inflation remained stubbornly high”. The IMF has warned that the challenges “the global economy is facing are immense and weakening economic indicators point to further challenges ahead”.

The cause of the global currency crisis is the rising US dollar. The dollar index (DXY), which measures the US dollar against an average of six other major currencies, has risen by 15 per cent in 2022, which is the highest increase in 20 years.

This is the direct result of the US central bank’s aggressive efforts to contain domestic inflation (which is at a record high this year in the US) by raising interest rates on government treasuries. The series of rate increases by the Federal Reserve this year has resulted in record sales of US government bonds and a consequent sucking in of dollars from the world currency markets. The growing demand for dollars to buy these bonds has pushed up the dollar rate.
This policy, aimed at easing domestic inflation in the US, has wreaked havoc across the world because the dollar is the world’s reserve currency. The Federal Reserve has little or no concern on how the rest of the world is affected by its actions and has signalled that it will continue to raise rates till US inflation is contained. In October too, it raised interest rates by three quarters of a percentage point taking the rate to its highest point since the financial crisis of 2008.

The US dollar strengthening is a disaster for the world economy. In order to protect their currencies, nations must not only deplete their foreign exchange reserves but in many cases also raise interest rates to stem the outflow. This results in higher domestic borrowing costs, which coupled with rising import and debt servicing costs are a combination designed to wreck economies or push them into recession. And all this for no fault of their own.

It is clear to most nations that the world economic system desperately needs one or more alternatives to the toxic US dollar. To prevent a possible collapse or severe contraction of world trade, national economies and growth, nations need to invent means that will serve as alternatives. So far, all attempts to bypass the dollar have failed, but not for want of trying. Today, however, there is a new urgency and the months ahead are certain to witness the emergence of a plethora of alternatives to get away from the unbearable pain of the mighty dollar.