The writer is president of Rockefeller International
The soaring dollar has demonstrated its power over the world in recent months, heightening stress in financial markets and in all countries alarmed by the prospect of paying bills and borrowing in increasingly expensive greenbacks.
Most analysts attribute the surge in the dollar over the past year to the rise in US interest rates, necessary to fight inflation. But the dollar has become a wrecking ball, rising far more than you would expect based on fundamentals, including the interest rate differential in the United States and the rest of the world. world. Its extraordinary spike is fueled by investors who think the dollar is the only safe haven and speculators who bet it will continue to rise.
Irrational behavior has consequences. A dollar disconnected from fundamentals makes no sense and can trigger a financial crash that pushes the global economy into recession. So now is the time for the Biden administration to abandon its indifference to the soaring dollar, recognize its destabilizing effects, and rally countries to weaken the dollar by selling it.
Hardly anyone expects Washington to do so, as Biden aides have made it clear they aim to help the Federal Reserve fight inflation in the United States and believe a strong dollar helps contain inflation by making imports cheaper. This logic is widely accepted.
This is also largely false. Imports make up 12% of gross domestic product in the United States, about a third of the average for developed countries, and have a minor effect on US prices. More importantly, the dominant dollar is used to set the price of most global goods, including 95% of US imports. Thus, a change in the value of the dollar does little to change the price Americans pay for these imports.
This immunity is rare. Other countries pay more bills in foreign currencies and are more vulnerable to currency fluctuations. When the dollar drops 1%, inflation in the United States only increases by 0.03%. When other currencies fall this far, inflation rises three times faster in other developed economies, and up to six times faster in emerging economies.
The key point is that the Biden administration could help weaken the dollar without undermining the Fed’s efforts to contain US inflation. In fact, America is less threatened by the imagined impact of the dollar on US inflation than by its proven impact on the global economy.
Before last week, the dollar had climbed more than 20% in 12 months, matching or exceeding the surges that have accompanied the last seven major global financial meltdowns dating back to the Latin American debt crisis of the early 1990s, including including the dotcom meltdown of 2001 and the global financial crisis of 2008.
These crises have engulfed several countries, including the United States, refuting another popular misconception of the United States, namely that a strong dollar is only a “problem” for the rest of the world.
This year, two out of three central banks in the emerging world are selling dollars, a record share since at least 2000. Japan has joined them, intervening directly in the foreign exchange market for the first time in a quarter century. But piecemeal national efforts to strengthen their own currencies have less impact than coordinated intervention.
Since central banks, including the Fed, cannot – must not – stop raising interest rates until inflation is clearly under control, coordinated selling is the only tool left to ease the dollar-induced tensions still visible around the world, from low-income countries to Europe.
US-led efforts to weaken the dollar have generally proven successful in the post-Bretton Woods era, particularly when these conditions are met: the dollar is seriously overvalued; speculators are very long on the dollar; coordinated government intervention surprises markets; and central bank monetary policy pushes currencies in the same direction.
Today, the chances of success are good. Although Fed policies are pushing the dollar higher, it is now seriously overvalued, fueled by high speculative positions, and a coordinated intervention, led by the US Treasury, would be a shock.
Normally, government interference in currency markets is ill-advised, but the dollar remains at irrational highs – nearly 40% more expensive than at any time since 1980 – and another rise could trigger a global recession.
The Biden administration has everything to gain from moving now. Acting to shield the United States from the real risk of a global recession rather than the imagined risk of dollar-led inflation would win applause from a world reeling from the government’s hands-off policy on dollar.