When World War II came to a conclusion in 1945, celebrations broke out all around the world. Since then, the US has developed into a powerhouse, and the value of the US dollar has had a significant impact on its global influence.
About 60% of the foreign exchange reserves held by central banks worldwide are invested in assets denominated in dollars, despite continuing predictions that the dollar will weaken.
Likewise, the US dollar accounts for over 40% of all global payments while accounting for over 60% and 50% of all international debt and loans, respectively. Although the US dollar still rules the world’s financial activities, this does not necessarily mean that the rest of the world will benefit.
Although the rest of the world laments the dollar’s dominance, Eswar Prasad, an economist at the Brookings Institution and a professor at Cornell University, points out that there is now no workable substitute.
The US dollar is appealing because of things like the size of the US economy, it’s standing as a reserve currency, and its consistency as an engine of economic growth. Money flows into the US dollar during difficult times because it is regarded as the safest currency to put money in, and the dollar increases when the US economy does quite well in comparison to other nations. These elements finally solidify the dollar’s dominance.
Yet, this poses a significant issue for low-income nations with significant foreign debt, particularly debt denominated in dollars.
Developing countries are becoming more and more dependent on the US dollar for commerce and finance, which can have major domestic repercussions, particularly during the unrest.
For instance, investors flocked to investments denominated in US dollars, such as bonds and fixed deposits, when the US central bank, the Federal Reserve, started hiking interest rates in March 2022 to fight inflation.
In September 2022, the US dollar index, which compares the USD to a basket of six different currencies, reached a record high for a 20-year period, adding to global inflationary pressures.
Many low-income nations had difficulties after borrowing dollars to import commodities like food and oil. Globally, average consumer prices increased.
The dollar reserves held by these nations started to get dangerously low as prices rose. The worst economic crisis in Sri Lanka’s history and the president’s resignation were both a result of depleting reserves.
Pakistan was having trouble repaying its loans as the rupee touched a record low versus the dollar, while Ghana and Egypt were also dealing with rising food prices and a flight of foreign investment out of their countries.
The strength of the dollar also brought up terrible memories of the 1997 financial crisis, when investors were alarmed when the South Korean, Indonesian, and other countries in the area experienced a rapid spread of disorder when Thailand’s central bank ran out of US dollars.
While a strong dollar gives exporters from Europe and Asia a competitive advantage over American domestic companies, it does not offset the greater cost of borrowing dollars. Despite the fact that a strong currency may result in cheaper imports for the US, the US does not import much.
Because of this, a large portion of the world suffers from a powerful dollar, while the advantages of a US currency are modest and temporary. Developing markets are caught in a vicious cycle whereby they borrow in dollars and then find it increasingly difficult to repay debts with local currency earnings as the value of the dollar rises.