The dollar’s surge over the past few weeks has been a source of concern for the rest of the world, particularly emerging markets. At the end of April, the “dollar index” – the benchmark indicator measuring appreciation of the US currency against a basket of currencies – exceeded the $106 threshold (around €98), approaching the all-time high of $113 achieved in October 2022.
At the end of April, the Indonesian rupiah fell to an all-time low against the greenback, forcing the country’s central bank to intervene on the markets and raise interest rates to support its currency. The Indian rupee and Malaysian ringgit also plunged. “A strong dollar is never good news for emerging economies,” said Neil Shearing, chief economist at Capital Economics.
And with good reason: Particularly for raw materials, it increases import costs, paid for in dollars, at the risk of fuelling local inflation. This is bad news at a time when many countries are desperately trying to combat rising prices, something that particularly affects the poorest.
Foreign debt, half of which is denominated in dollars, is also more expensive to repay, especially as it has increased in recent years. According to the latest figures published on May 7, by the Institute of International Finance, an international association of private investors, this debt has reached a record level of $105,000 billion in emerging countries, more than double the figure of $50,000 billion 10 years ago. “Large emerging countries such as Brazil and India are turning more to their domestic markets for borrowing, which puts them in the clear,” said Shearing.
‘High and persistent uncertainties’
Admittedly, the weakness of their currencies encourages exports from these countries to the United States. But the soaring US dollar also forces them to maintain high key interest rates in order to prevent capital outflows to the US, where yields are not only higher but also safer. However, these high rates increase the cost of local credit, to the detriment of businesses. While these countries may be tempted to breathe new life into their economies by lowering interest rates, fear of seeing capital vanish to the US may dissuade them.
Brazil’s Central Bank has therefore slowed the pace of its key rate cut. On Wednesday, May 8, it reduced it by just 0.25 percentage points, to 10.50%, justifying this decision with “heightened and persistent uncertainty about the beginning of the easing cycle in the US.” The following day, the Bank of Mexico kept its rate unchanged at 11%.
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