It is 1985, the US dollar is unbeatable, it is the reigning champion of the World’s heavy weight currencies. The beefed up greenback is knocking out all challengers, it has to be stopped, reasoned economists from the other major World economies.
And so, that year finance ministers from the US, Germany, Japan, France, and the UK all inked an agreement to devalue the dollar, even the US was in on the agreement, laughing to the bank of course.
The decision to ‘intervene’ became known as the Plaza Accord, a joint agreement amongst central banks all around the World (including the US) to tinker with currency markets in a bid to put the dollar in check.
- The US dollar up 17% and rising
- Federal Reserve monetary policy behind rising dollar
- Strong dollar weighs heavy on Africa’s debt servicing
So with the heavy weight dollar playing Muhammad Ali again, almost half a century later, the million dollar question is, is it time for another Plaza Accord?
Political analysts and economists think reaching a consensus this time around is not only difficult but downright impossible, not with the bad blood between the US and China.
Then there is the matter of the Russia-Ukraine war, the US is not expected to agree to devaluation of the dollar when the stronger its value the stronger leverage the US has against its arch enemy.
Why is the dollar so strong?
While other currencies are struggling, the US dollar has climbed in value to the heights of nearly 17% thus far. As Forbes put it, “… nearly every asset class has seen miserable returns in 2022, except for the United States dollar.”
So how is the dollar muscling up when other currencies are nearly dyslexic? The first and most obvious reason is the high interest rate placed on the dollar by the US Federal Reserve.
Why the Federal Reserve chose to rise interest rates is a no-brainer given the persistent soaring of prices, the fiscal move was meant to curb inflation. However, the end result is a beefed up dollar against malnourished global currencies.
In an interview with Forbes at the end of September, financial expert Matt Forester who is the Chief Investment Officer at BNY Mellon Pershing admitted that; “It’s a juggernaut in the middle of every securities transaction and payment around the globe.”
Given these facts, this would be a good time to buy if you are an American importer or elsewhere in the World this is the best time to pull out your hidden stash of dollars and change it, you are bound to earn big this week.
Actually, you might want to hold on to that idea and sell later this year because the green muscle buck is only expected to get stronger as pundits project even further rate increases by the Federal Reserve that will only make the dollar even stronger .
All things considered, the dollar’s resilience to the feared recession is an embodiment of the overall strength of the US economy, especially compared to the UK and the rest of Europe.
Not to blame European economies, because they are holding the short hand of the stick given their lack of support in Russia’s war on Ukraine. Since the former is their energy supplier, the cost of living across Europe has significantly short up as a negative multiplier effect of rising energy costs.
Remember the suggestion to sell your stock pile of dollars? Well investors are doing just the opposite, they are buying up the dollar, further strengthening the Benjamins.
You see, with the global economy shaky, the European economic woes worsening, caused by Russia’s oil bullying and in Asia, strong economies like Japan just not selling as much as they used, investors are looking for stable store of value, and the dollar is looking ever so lucrative.
In the long run, the sell of of the weaker global currencies and the buying of the dollar (which further strengthens it) is actually working, it is lowering inflation in the US just as the Federal Reserve hoped.
Further still, since European, and really all other goods from around the world are now been bought at cheaper prices thanks to the strength of the dollar, Americans are again spending, and why not, the same basket of goods that cost X amount of dollars last month now cost a half of X.
Things might be good for the common man around the corner but for multinational conglomerates, the strengthening of the dollar only spells doom. This is because these giant companies get most of their earnings abroad, in foreign currencies that they then have to change into dollars, get where that is going?
So what can we expect over the cause of the reaming part of the year? For folks in Washington, Texas, New York and California Christams has come early this year, but across the seas in Europe and Asia, things are not looking so merry. If Russia-Ukraine war does not let up, then the price of fuel in Europe will only worsen and as result it will keep the price of production high.
What does a strong dollar mean for Africa?
High costs of production in Europe spells trouble for Africa, a major importer of European finished products. African importers and the general public will have to shoulder the weight of this increased cost in terms of higher prices for finished products, Africa can expect sustained inflation over the remainder of the year.
Traditionally, African countries hold quiet a significant dollar denominated debt, those are just big words to say that when African countries borrow, the loans are valued in terms of dollars. Now that’s a problem when say, as is the case now, the value of the dollar soars, because that means that African countries have to spend more of their money to pay up their loans.
In simpler terms, since the value of the dollar is high and the African debt amount is in dollars, it follows that it is today more expensive to pay the same debt as it was last year. Needless to say, when it comes to debt servicing, a strong dollar spells trouble for Africa.
Don’t take my word for it, lets hear it from the experts; “As a result (of the dollar strengthening) African governments and corporates will find it harder to service dollar denominated debts, especially where they earn revenues in local currency. Whilst African governments and corporates might increase output to keep up with the strengthening of the dollar against the relevant local currency, this is almost impossible, particularly if the production of their commodity depends on importing machinery or other input goods from abroad… ” warns financial analysts at Hogan Lovells in article titled’ What does a stronger dollar mean for Africa?’