Spreads pain globally as dollar rises | Business and Economic News

The cost of living in Cairo has risen so much that security guard Mustafa Jamal had to send his wife and elderly daughter to live with his parents in a village 70 miles (112 km) south of the Egyptian capital to save money.

Jamal, 28, was left behind, working two jobs, sharing an apartment with other young people and eliminating meat from his diet. “Everything has doubled in price,” he says. “There was no alternative”

People all over the world share Jamal’s pain and frustration. An auto parts seller in Nairobi, Kenya, a children’s clothing seller in Istanbul, Turkey, and a wine importer in Manchester, England all share the same complaint: A rising U.S. dollar weakens local currencies and causes prices to skyrocket. for everyday goods and services.

This adds to the financial strain on families already facing food and energy crises linked to Russia’s intervention in Ukraine.

“A strong dollar makes a bad situation worse in the rest of the world,” says Eswar Prasad, a trade policy professor at Cornell University. Many economists worry that the sharp appreciation of the dollar raises the possibility of a global recession sometime next year.

According to the ICE U.S. Dollar Index, which measures the greenback against a basket of major currencies, the greenback is up 18 percent this year and hit a 20-year high last month.

The reasons for the appreciation of the dollar are not a secret. To combat rising US inflation, the Federal Reserve has raised short-term interest rates five times this year and signals more hikes are on the way. This led to higher rates on a wide range of US government and corporate bonds, attracting investors and causing the US currency to appreciate.

Most other currencies are weaker by comparison, especially in poor countries. The Indian rupee has fallen by nearly 10 percent against the dollar this year, the Egyptian pound by 20 percent and the Turkish lira by a staggering 28 percent.

Celal Kaleli, 60, sells children’s clothes and diaper bags in Istanbul. Because it needs more pounds to buy zippers and liners imported from abroad in dollars, it has to raise prices for its Turkish customers, who find it difficult to pay with the local currency, which has become much cheaper.

“We are waiting for the new year,” he says. “We will review our financial capacity and make cuts accordingly. There is nothing else we can do.”

Rich countries are not protected from this. The euro is below $1 for the first time in 20 years in Europe, already teetering on the brink of recession amid rising energy prices, and the British pound is down 18 percent from a year ago.

The pound recently flirted with parity with the dollar after new British Prime Minister Liz Truss announced major tax cuts that rocked financial markets and led to her sacking as treasury secretary.

“Bad news” for the global economy

An appreciating dollar causes pain abroad in many ways, including making imports more expensive for countries [File: Brian Inganga/AP Photo]

Generally, countries can benefit from depreciating currencies because it makes their products cheaper and more competitive abroad. But for now, any gains from higher exports are muted as economic growth jumps almost everywhere.

A rising dollar causes pain abroad in several ways:

  • This makes other countries’ imports more expensive and increases existing inflationary pressures.
  • It squeezes companies, consumers and governments that borrow in dollars. Because more local currency is needed to convert into dollars during loan payments.
  • This forces other countries’ central banks to raise interest rates to try to strengthen their currencies and prevent money from fleeing their borders. But these high rates also dampen economic growth and increase unemployment.

“A strong dollar is bad news for the global economy,” said Ariane Curtis of Capital Economics. “This is another reason why we expect the global economy to go into recession next year.”

Businesses are struggling and customers are unhappy in a gritty Nairobi neighborhood known for car repair and auto parts sales. With the Kenyan shilling depreciating by 6 percent this year, the cost of fuel and imported spare parts is so high that some people are ditching their cars and opting for public transport.

“It’s the worst,” says Michael Gachie, purchasing manager for Shamas Auto Parts. “Customers complain a lot.”

2022 is uniquely painful

A man leaves a currency exchange shop in Istanbul, Turkey, holding banknotes
A rising US dollar is uniquely painful because it adds to already high inflationary pressures amid the Ukraine war. [File: Khalil Hamra/AP Photo]

Gyrating currencies have caused economic pain around the world many times before. For example, during the Asian financial crisis of the late 1990s, Indonesian companies borrowed heavily in dollars during the boom, which was then destroyed by the depreciation of the Indonesian rupiah against the dollar.

A few years ago, the peso’s fall caused similar pain to Mexican businesses and consumers.

However, a rising dollar in 2022 is uniquely painful. At a time when prices are rising, it increases global inflationary pressures. Disruptions in energy and agricultural markets as a result of the war in Ukraine have exacerbated supply constraints stemming from the COVID-19 recession and recovery.

Raymond Manaoq, 29, who drives a colorful Filipino minibus known as a jeep in Manila, complains that inflation, and especially the rising cost of diesel, is forcing him to work harder.

“What do we have to do to earn enough for our daily expenses,” he says. “We used to walk our routes five times, now we do it six times.”

In New Delhi, India, Ravindra Mehta has thrived as a broker for American almond and pistachio exporters for decades. But the rupee’s record low — on top of higher raw material and transportation costs — has made nuts more expensive for Indian consumers.

India imported 400 containers of almonds in August, up from 1,250 containers a year ago, Mehta said.

“If the consumer isn’t buying, it affects the entire supply chain, including people like me,” he says.

Kingsland Drinks, one of the UK’s biggest wine bottlers, was already being squeezed by higher costs for shipping containers, bottles, caps and energy. Now, a rapidly rising dollar is driving up the price of wine it buys from vineyards in the United States, even Chile and Argentina, which like many countries rely on the dollar for global trade.

Kingsland offset some of its foreign exchange costs by entering into contracts to buy dollars at a fixed price. But at some point, “those hedges run out and you have to reflect the reality of a weaker sterling against the US dollar,” says Ed Baker, the company’s managing director.

Translation: Customers will soon have to pay more for their wine.

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