The aggressive strengthening of the dollar is a cause for concern because it affects the economies of all countries around the world. The appreciation of the dollar against the euro began back in 2011, when the European currency was stressed by the Greek debt crisis and the problems of the economies of the PIIG group. The rise in the cost of energy has accelerated inflation, and the consistent and aggressive increase in monetary policy interest rates by the Federal Reserve has strongly strengthened the growth of the dollar against world currencies.

The dollar is the sovereign currency of the world’s energy and commodity markets. From oil to wheat, from gold to coffee, almost all raw materials consumed by the world and mostly imported are valued in US dollars.

But how much has it affected our economy? Surprisingly, the stability of the lei against the euro, small borrowings in dollars and an active trade balance in business with the US form a protective shield for our economy in the face of an aggressive strengthening of the dollar. Of course, they do not give us complete immunity, but they protect against shocks experienced by neighboring countries, to which are added the energy crisis, inflation and geopolitical tension.

The first negative effect, also noticeable in Romania was the increase in inflation in the first quarter of the year against the background of the increase in the price of raw materials, which are sold in dollars on commodity markets.

In addition, money is flowing en masse from more fragile markets to the vast American financial market, which is capable of providing better returns and increased security for investors. An exciting combination, but affects emerging markets. A risk that was also taken into account in the latest financial stability report published by the BNR, which warned that massive capital outflows from the developing world region could also affect Romania, which is “in a delicate position as a result of the balance of payments”.

Another potential risk The strengthening of the dollar may increase the cost of servicing foreign debt. However, Romania takes a cautious position: loans in dollars amounting to 57.68 billion lei make up only 9.1% of Romania’s total external debt. According to the central bank, the 8.85 billion lei in dollar-denominated loans made by Romanian banks represents only 1.5% of total loans and is likely to be granted mainly to companies doing commercial business with the United States.

The capital market has been affected by the strategic departure of foreign portfolio investors to the US market, but it appears to be holding up better than its peers, likely supported on the one hand by a more stable currency and on the other hand by a strong presence of energy stocks, which will bring significant dividends The BET index of the Bucharest Stock Exchange, which rose last week, has however lost 15.8% of its value since the beginning of the year. However, Bucharest’s stock market is doing much better than the markets of the capital Budapest or Warsaw, whose indices have fallen by 21.85% and 38.83% respectively this year.

Fragile commercial advantage

We also have an advantage that we must use and expand: our trade with the US. In trade with the USA, we have a positive balance, that is, we export more than we import. The turnover is relatively modest – 4.5 billion dollars. The strengthening of the dollar creates an advantage for Romanian exporters, who must intensify their efforts to expand sales. Authorities that manage international trade affairs should strengthen ties with the American market, whose enormous size can easily accommodate much larger imports from Romania. Unfortunately, there is no consistent and effective program for promoting Romanian business to the huge American market.

Why did oil become cheaper for Romania, but not for Hungary?

This authoritarian dominance comes with risks, but it can also have a calming effect on the prosperity of some markets. According to the logic of commodity markets, a strong dollar holds back the rise in commodity prices – and vice versa. Therefore, the commodity-dollar relationship has the ability to balance the global economy through compensation.

A recent example seems to demonstrate the intensity of the dollar-commodity relationship. In March, after the start of the war in Ukraine, Brent crude oil prices averaged $117.25 per barrel. At the end of September, a barrel of Brent oil cost $85.14, which is 27.5% cheaper than in March.

Well, the lei devalued against the US dollar by 13% during this period, as, by the way, did the European currency. So, while the dollar used to buy oil has risen by 13%, the fall in oil prices has been stronger, so black gold is now cheaper for buyers in Romania than it was in March.

Leo, more stable than the currencies of its neighbors

The Romanian leu has also devalued against the US dollar, but it is in a much better position compared to other currencies in the region. We have to observe the reality of the Romanian currency market: the leu quote is set according to the euro, there is no direct influence of the dollar on our currency.

Since the beginning of the year, the lei has devalued by 18.5% against the dollar, and this change is solely due to the strengthening of the American currency against the euro.

In addition, during this interval, the lei devalued almost imperceptibly against the euro, losing 0.0060 lei, i.e. 0.13% of its value.

This cannot be said about the coins of the region. For example, the forint has devalued by 31.5% against the dollar and by 14.2% against the euro since the beginning of the year. On December 31, 2021, one dollar bought 325.71 forints. On September 30, one dollar was worth 428.57 HUF at the official exchange rate.

The massive devaluation of the forint accelerated despite an aggressive increase in the monetary policy rate by the National Bank of Hungary.

With inflation at 13.8%, the discount rate in Hungary is 13%, which is quite high for companies and the public, but ineffective in trying to strengthen the forint.

And the Polish zloty devalued sharply. On October 3, one dollar bought 4.9589 zlotys, which is 22.63% cheaper than on December 31, 2021, when the dollar rate was 4.0445 zlotys. However, over the past 12 months, the zloty has devalued by 44.8% against the US dollar.

In other words, for Romanian companies, oil is now cheaper compared to the March price hike, as the leu has devalued much less than oil has depreciated. For Hungarian companies, however, the 27.5% drop in oil prices is completely overshadowed by the 31.5% appreciation of the dollar.

Although the stability of the leu against the euro is solely the result of the monetary policy of the central bank, which preferred not to cause inflation by devaluing the currency, we cannot fail to note the fact that it is quite possible that investors look favorably on the Romanian currency. reduce dependence on the Russian economy and further punish energy dependence on Russia in the case of forints and zlotys.

The strengthening of the dollar is not a milestone

The euro rallied against the US currency today in a financial market engulfed in conflicting news, but analysts warned that this is a temporary account that will not last for the foreseeable future. What is the driving force behind the dollar’s rise and how long can its rise against major world currencies last?

The dollar absolutely dominates the international currency market, and analysts predict that its strengthening will continue, most likely, until 2024. The assessment is based on the complexity of impulses that strengthened the US currency.

Of course, decisive action by the Federal Reserve, which has aggressively raised interest rates to curb inflation faster, more often and more than the European Central Bank, is seen as supporting the dollar’s appreciation. But if we remember that the dollar rate has slowly but steadily appreciated over the last ten years in relation to the euro, we must understand that the increase in the dollar rate depends not only on the speed with which interest rates rise. The US economy recovered more quickly from the major financial crisis that began in September 2008 and has shown higher growth rates than its European counterparts.

In addition, the American capital market attracted investors’ money like a magnet, and in order to buy stocks on Wall Street, you had to convert euros or pounds into dollars. So, the massive flow of money into dollars is neither a new phenomenon nor an emotional market reaction. In addition, it is true that the reaction speed of the Federal Reserve is now higher compared to the European Central Bank, but we must not forget that in the Eurozone the intensity of the financial crisis led to unorthodox decisions: the Eurozone had negative interest rates, as did the Japanese Yen, in addition, but in the US, monetary policy interest rates remained in positive territory. The superimposed crises in the European economy ruled out the possibility of a jump from the negative territory to interest rates similar to the dollar.

In fact, the excessive strengthening of the dollar has upset almost all the economies of the world. An interesting, even surprising piece of news drew my attention to the extent of the devaluation of the European currency against the dollar. Probably not related to the international currency market. Last week, Germany launched a protective shield to protect its economy and household consumers from the effects of rising energy prices.

But here’s where the revelation about the dollar’s strength position is hidden: while the European press announces a financial effort of 200 billion euros, the Wall Street Journal notes that Germany will invest 194 billion dollars in the defense shield. A year ago, The Journal would have reported that the “shield,” valued in dollars, would cost $231 billion. This huge difference of $37 billion describes the tension in the international currency market, where the dollar has risen sharply against the single currency.

N. Red: Christina Kyriac, President of the National Confederation of Women’s Entrepreneurship (CONAF), has a PhD in Economics with management experience. She specializes in finance, banking, stock exchanges and insurance, and is a valuer, consultant and financial auditor, bankruptcy lawyer, mediator and international arbitrator in mediation. Kyriac was vice president of the Office of Public Assets Valuation, where she coordinated the post-privatization and bankruptcy division.