Dollar Becomes Awkward VIP Guest at Global Finance Meetings

The supercharged dollar is almost everyone’s problem—but it’s the one challenge that the masters of the global economy can’t directly address.

The U.S. currency has soared almost 15 percent this year, on course for the biggest gain since the early 1980s. Nations across Asia and Latin America have been tapping their foreign reserves in an effort to shore up their currencies, prompting a caution from the International Monetary Fund (IMF) about the need to be prudent and preserve resources for potentially worse turmoil to come.

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

In Washington, where the IMF and World Bank are holding a semiannual gathering this week, the strong dollar has been dominating conversations, according to a person familiar with the matter. Finance ministers have brought it up with the IMF, U.S. Treasury, and the Fed directly, the person said, asking not to be named as the talks weren’t public.

Finance chiefs engaging with the United States 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, the person familiar with the matter said.

Given the U.S. inflation challenge—highlighted Thursday when a report showed core consumer prices climbed more than expected last month—there’s recognition that there’s little else the Fed can do but to keep going.

The U.S. Is Not an Island

“Think of the the scenario in which inflation in the United States doesn’t get under control for a long period of time,” IMF managing director Kristalina Georgieva said Thursday. That would be “bad for the U.S., but it also has spillover impacts for the rest of the world.”

South Africa’s central bank governor, Lesetja Kganyago, acknowledged as much, even as the rand slumps toward the record low against the dollar that it hit in 2020. He said in an interview Thursday that inaction by the Fed “could actually lead to bigger costs down the line as policy would have to respond even more aggressively in the future.”

U.S. officials have signaled recognition of the impact on other countries, privately and publicly. Treasury Secretary Janet Yellen said Wednesday that “we will also be attentive to the global repercussions of our policies.” Fed vice chair Lael Brainard said Monday that “uncertainty remains high, and I am paying close attention to the evolution of the outlook as well as global risks.”

The fact that the Fed is practically universally thought to have more work to do to contain inflation is a major difference from 1985, when the world’s top industrial powers agreed to rein in the dollar in what became known as the Plaza Accord.

Fed policymakers by that time had already brought inflation down below 4 percent, from a peak of near 15 percent in 1980. Thursday’s CPI report showed an 8.2 percent annual increase, well distant from the Fed’s 2 percent target. Markets expect further Fed hikes totaling about 1.75 percentage points by March.

Even so, European Central Bank (ECB) policymaker Francois Villeroy de Galhau said Tuesday that foreign exchange (FX) interventions by the Group of Seven—the successor to the narrower coalition behind the Plaza Accord—can be effective if there’s a coordinated approach.

Yellen, who sets U.S. dollar policy as Treasury secretary, has given no hint of openness to such coordination. She said Tuesday that “a market-determined value of the dollar is in America’s interest,” speaking on CNBC. “The currency movements are a logical outcome of different policy stances.”

Foreign Governments Take FX Action

With no consensus backing action to address the dollar, some have acted on their own. Japan last month intervened to prop up the yen for the first time since 1998. Its renewed weakening since has spurred speculation Tokyo may act again. Emerging markets also have run down a measure of their reserves.

Another difference from four decades ago: Many emerging markets are in substantially stronger positions. Latin America was ground zero for a debt crisis in the 1980s, but some countries in the region have currencies that have appreciated against the dollar this year, thanks in part to having started raising rates well ahead of the Fed.

Higher commodity prices have helped a number of developing nations. And the development of local-currency bond markets has also been a powerful aid in limiting turmoil so far.

“Major emerging markets have largely solved the problem of ‘original sin,’” Udith Sikand, a senior emerging-markets analyst at Gavekal Research, wrote in a note Thursday, using a term describing an excessive reliance on borrowing in foreign currencies. “By broadening and deepening their domestic financial markets, they are now more able to borrow from international investors in their own currencies.”

That hasn’t stopped many from falling into crisis, including Sri Lanka and Pakistan. “We must be prepared to help countries that fall into distress,” Yellen said Wednesday, urging creditors to participate in debt-relief efforts.

As for the dollar, there was no specific mention by the G-7 finance chiefs in their communique on Wednesday. The statement reaffirmed language from 2017, which noted that “excess volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability,” while committing to “market-determined exchange rates.”

—With assistance from William Horobin.

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