Its launch dollar for several decades now it has been hitting developed economies, just as it hit emerging markets so far. Permanent buff from her aggressive move Federal Reserve in restrictive monetary policy, the superpower’s currency puts pressure on other strong currencies that compete with it, driving up the cost of imports, imposing tighter financing terms, and fueling inflation elsewhere. Thus, it increases the pressure on other central banks to raise interest rates at a time when the energy crisis and ever-accelerating inflation are undermining the European economy and rising borrowing costs are freezing housing markets in Australia, Canada and New Zealand.

The global impact of Federal Reserve monetary policy is nothing new. However, for the first time in recent years, such a significant strengthening of the dollar is felt more in the currencies of developed countries than in emerging markets. Since it became clear about a year ago that the Fed would move to tighten monetary policy, the currencies of developed countries have come under at least the same pressure as the currencies of emerging markets. The dollar index against the currencies of developed countries rose this year by 10%, reaching a 20-year high. At the same time, its strengthening against the currencies of emerging markets is much less, namely by 3.7%. Bloomberg tracked 31 major dollar exchange rates and found that four developed-country currencies were among the top 10 losers and only one, the Canadian dollar, was among the top 10 winners. “A strengthening dollar is usually accompanied by higher US interest rates or pressure on international markets and switching investment funds to the safety of the US currency,” said Maurice Obstfeld, director of the Peterson Institute for International Economics. And he concludes that “these more difficult financing conditions lead to a slowdown in the growth rates of the economies of developed countries.”

The pressure exerted by a strong dollar on developed economies will be visible today and at the meeting ECB, which is expected to raise interest rates by 75 basis points as it faces record inflation and the euro is below one-for-one parity with the dollar. For the ECB, whose currency trades against the dollar more than any other currency, the energy crisis has reminded its leaders of the role the euro plays in the path of inflation. Speaking to Reuters a few days ago, Isabelle Schnabel, chief executive of the ECB, said that “in the current moment of the energy crisis, I would say that euro parity is more important.” In addition, the Bank of Canada is expected to raise its own interest rates by 75 bp as well. while the Bank of Australia has just raised interest rates by half a percentage point. As for Britain, already in recession according to business lobbyists, the Bank of England is expected to raise borrowing costs again on September 15 as it appears to have lost investor confidence which has sent sterling to its lowest ever level since 1985.

The effects are being felt in Europe, as well as in Australia, Canada, the UK and Japan.

At the same time, the Bank of Japan is also under pressure. The yen fell above 143 yen to the dollar, narrowly missing the 146 yen level that prompted Japan to intervene jointly with Washington in 1998 to prop up the Japanese currency. What, after all, at such low levels fuels inflation, which has reached 3%. What worries policymakers in many countries most is that raising their own interest rates will not support their currencies, as their economies look more fragile than America’s. The British pound will continue to fall from the lows reached during the first wave of the pandemic in March 2020.

Meanwhile, most emerging markets have fared much better this time around than during similar periods in the past. Some, such as China and India, have intervened in the market to support their currencies, but this is politically difficult to do in developed countries.