- A stronger dollar hits export-oriented economies like Japan and Germany particularly hard, and their weakening currencies compress margins for their manufacturers who rely on dollar-denominated imported raw materials.
- With the Fed in full-on inflation-fighting mode, the U.S. is exporting even more inflation than it had been previously
Not so long ago, in a global economy not so far away, governments would accuse each other of devaluing their currencies to boost exports.
But decades of loose monetary conditions and the fastest pace of inflation in over four decades in the United States is forcing the U.S. Federal Reserve to tighten policy and raise rates for the first time in years, paving the way for other central banks to follow suit, even if such a policy is inappropriate for their specific economic conditions.
Because commodities are priced in dollars, the Fed raising interest rates devalues the currencies of other countries and exports inflation, while making dollar-denominated materials cheaper for American consumption.
A stronger dollar hits export-oriented economies like Japan and Germany particularly hard, and their weakening currencies compress margins for their manufacturers who rely on dollar-denominated imported raw materials.
With the Fed in full-on inflation-fighting mode, the U.S. is exporting even more inflation than it had been previously.
Whereas countries like Germany and China, which ran big trade surpluses, often got blamed for free-riding on demand generated elsewhere, the U.S. has now narrowed the trade deficit to its lowest level in decades and that has everything to do with a soaring dollar.
And that could be a major problem for the exporting powerhouses of China, Japan and Europe.
Because monetary policy is a blunt instrument that tries to rein in prices by dampening domestic demand, imported inflation, which China, Japan and Europe are susceptible to because they import raw materials denominated in dollars, will find themselves stuck in a quagmire where they must raise rates, but doing so will just slow their already lackluster economies.
