Dollar Dilemma

The US currency is up about 15% for the year, on course for the biggest surge since the early 1980s. And the consequences of its steep appreciation have been dominating conversations at meetings held in conjunction with a semiannual gathering of the IMF and World Bank.

Impact: The impact of currency strains has been piling up:
  • The yen on Thursday weakened past levels that recently spurred Japan to intervene in the market. With the weakest exchange rate since the 1990s, prospects are for even bigger trade deficits as energy-import bills climb.
  • Euro area officials are also contending with diminished purchasing power. France’s central bank governor, Francois Villeroy De Galhau, recalled the days when the Group of Seven mounted coordinate interventions.
  • Developing nations with big dollar-debt burdens face rising repayment risk. Central Bank of Kenya Governor Patrick Njoroge warned about some becoming effectively “shut out of the capital markets.”

Effects: The big worry is the Federal Reserve’s campaign to tame runaway inflation by jacking up US interest rates — a key driver of dollar strength — is nowhere near done yet. That means currency pressures could get even worse as dollar gains help contain consumer prices in the US while threatening to send them spiraling higher everywhere else.

Finance ministers brought it up with the IMF, US Treasury, and Fed directly. They haven’t specifically complained, and don’t expect the Fed will do anything differently, but did want to detail the spillover effects face-to-face, a person familiar with the matter said.

There’s an underlying recognition that, with core US inflation running the hottest in 40 years, it’s impractical to think the Fed could ease off.



What is in it for you: “Think of the scenario in which inflation in the United States doesn’t get under control for a long period of time.”. That would be “bad for the US, but it also has spillover impacts for the rest of the world.”

And with the Fed counting on to hike, any sort of contemplation of coordinated currency intervention seems impossible — unlike the conditions in 1985, when the world’s top industrial powers agreed to rein in the dollar in what became known as the Plaza Accord. By 1985, the Fed had already brought inflation under control.

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