Dollar Pain Spreads

Developed economies are taking a hit from the dollar’s appreciation to multi-decade highs in ways that were once more familiar to their emerging market peers.

Causes: Fuelled by the Federal Reserve’s most aggressive tightening cycle in more than a generation, the stronger greenback pushes rival currencies lower, driving up the cost of imported goods, constricting financial conditions, and feeding inflation in other economies.

Effects :That’s ratcheting pressure on other central banks to raise interest rates just as an energy crisis and spiraling consumer prices hobble Europe’s economies, and increases in borrowing costs cool housing markets in Australia, Canada, and New Zealand. Yet their ability to influence the dollar’s strength is limited, meaning there’s little prospect for near-term relief.
While global ripples from Fed tightening aren’t new, this is the first episode in recent years where serious dollar strength has been more notable against developed-nation currencies as a group than against emerging economies.


What's in it for you : Dollar strength not only reflects an expectation about the federal funds rate hikes this year – and thus higher demand for US fixed-income assets – but also reflects global recessionary risks arising from the greater-than-previously-expected policy rate hikes around the world.

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