The new reign of the dollar punishes the rest of the world

In God we trust

, it has been read on all the coins and bills of the United States since then President Dwight Eisenhower decided so in the 1950s.

Americans believe in the hereafter, but also in the dollar.

And they are not the only ones.

The currency has become one of the few assets, in these times of war, recession threats and energy crisis, where putting money is not synonymous with losing.

International investors, besieged by the red of the stock markets, bonds and cryptocurrencies, have thrown themselves into the greenback like someone diving into an oasis in the middle of the desert.

And its colossal revaluation against the rest of the currencies is having no minor consequences for States, companies and citizens.

Compared to the rest, the foreign exchange market is usually not very volatile.

Except for sporadic episodes such as investor George Soros' famous attack on the pound sterling in 1992 or occasional collapses in emerging countries, fluctuations are usually small.

But that peaceful reality is changing.

Volatility is making its way fueled by interest rate hikes by central banks, which alter the price of money and join national currencies in a competition from which the dollar is coming out stronger: against it, the Japanese yen loses more than 20% in a year, the pound sterling and the euro more than 15%, and the Chinese yuan depreciates more than 10%, its worst decline since 1994.

The dollar index, which measures its evolution against a basket of currencies, is at its highest in almost 20 years.

And the reasons that explain its rise are several.

The US Federal Reserve began to raise rates before other central banks, and is being more aggressive in raising the price of money - it has placed it at 3%-3.25%, compared to 1.25% of the European Central Bank ( ECB)—, attracting more investors in search of yield.

The energy crisis is affecting the US less because, unlike Europe —very dependent on Russia—, it is one of the world's largest exporters of natural gas and oil.

And the drums of severe economic slowdown are gasoline for its price due to its safe-haven status, as is also the case with the Swiss franc.

The clearest consequences of this strength have to do with prices.

“The depreciation of the euro contributes to increasing inflationary pressures (by making its imports more expensive);

and, just the opposite, in the United States the appreciation of the dollar would be helping to control inflationary pressures”, they explain from BBVA Research.

In other words, the US exports inflation, not only to Europe, but to the whole world, through the dollar, because agricultural raw materials are priced in that currency and energy contracts are denominated in dollars, which makes gas purchases more expensive and oil, already fired by itself.

The voices that warn of the phenomenon even come from the US

This week he synthesized that situation with a simple headline: “The dollar is strong.

That's good for America, but bad for the world."

As Ignacio de la Torre, chief economist at Arcano Research, points out, there are other effects.

"An expensive dollar is generally bad for dollar-indebted emerging economies, but it also makes world exports to the US cheaper."

Traditionally, devaluations have been a way of gaining competitiveness under the logic that if your products and services are cheaper than your rivals, they will be sold more abroad.

Now, that advantage is diluted, according to Natalia Aguirre, Director of Analysis and Strategy at Renta 4. “The

energy that can lead Europe into recession outweighs the positive impact of a more depreciated euro, especially since external demand also suffers in a scenario of global economic slowdown”, he concludes.

BBVA Research agrees: “In the current context, the weak euro is more a sign of concern than an opportunity to export more”.

The authorities do not stand idly by as they watch their currencies sink.

The Japanese Ministry of Finance announced last week an unprecedented intervention in more than two decades with the aim of sustaining the value of the yen.

And the Bank of England has acted twice this week to try to stop the collapse of the pound sterling after the concern unleashed in the markets by the increase in debt that the tax cut plan announced by the British Executive may cause.

Olivia Álvarez, an analyst at Afi, believes that the collapse of the pound sterling and the financial instability in the United Kingdom respond to the erratic maneuvers of Downing Street, criticized even by the IMF.

"We are seeing a lack of coordination between monetary policy and government decisions, with a package of ultra-expansive fiscal measures that does not do inflation any favors."

Given these turbulence, can it be said that we are facing a currency crisis?

“That is too generic an expression.

Yes, it is correct in the singular.

The pound is a good example: the three G20 currencies with the worst performance in 2022 are the Argentine peso, the Turkish lira and the English pound”, recalls De la Torre, from Arcano.

Threat to income statements

Companies are not immune.

Although many have financial instruments that protect them from currency fluctuations, others do not cover that risk.

Sectors such as the airlines, which among other items pay for fuel in dollars and often for the planes in their fleet, are seeing their accounts penalized.

Jorge Labarta, founding partner of the foreign exchange consulting firm Quant, advises a good number of companies on the subject.

“We have clients who are well protected by buying dollars much cheaper, below their current price;

however, when those coverages run out they will have to return to the market to cover themselves, and the levels to do so will be much worse, ”he maintains.

Just as they help, these tools can also eliminate the beneficial part of the currency effect: for example, export firms that decided to be more conservative and not be exposed to the ups and downs of the dollar, now cannot take full advantage of its appreciation.

US inflation key

On the tourist side, the most obvious impact of the currency shock is that vacations abroad are much cheaper for Americans now than they were a year ago, although Americans are a more expensive destination, which can divert visitors to cheaper areas.

A similar dichotomy exists between expatriate community workers in the US whose companies pay in euros, who have lost purchasing power, and on the contrary with Americans who carry out their work in Europe and are paid in dollars, who have been less affected by the increased cost of living.

With the greenback already above the euro for the first time in 20 years, and a similar trend in other currencies, the uncertainty is maximum for investors, who have to watch the so-called currency risk more carefully than before.

The big question is whether there is room for the dollar's rally to continue.

For Labarta, everything will depend on the evolution of inflation in the US. “If it subsided, it would not be necessary for the Federal Reserve to raise interest rates further, and since the market takes the increases for granted, this would help the euro to appreciate.

Only the expectations of an end to the war, or a clear relaxation of prices in the US will change the trend.

With the recent Russian mobilization of troops, and US inflation at 8.3% in August —the figure for September will be known in two weeks—,

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