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As dollar rises, pain spreads around the world | Business and Economy News

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The cost of living in Cairo has increased so much that security guard Mustafa Gamal had to send his wife and one-year-old daughter to live with his family in a village 70 miles (112 km) south of the Egyptian capital to save money.

Gamal, 28, stayed behind, worked two jobs, shared an apartment with other teenagers, and cut meat out of his diet. “The price of everything has doubled,” he says. “There was no alternative.”

People all over the world share Cemal’s pain and disappointment. An auto parts dealer in Nairobi, Kenya, baby clothes dealer in Istanbul, Turkey, and a wine importer in Manchester, UK, all have the same complaint: A rising US dollar weakens local currencies, contributing to prices skyrocketing. for everyday goods and services.

This adds to the financial strain at a time when families are already facing food and energy crises linked to Russia’s invasion of Ukraine.

“A strong dollar makes a bad situation worse in the rest of the world,” says Eswar Prasad, professor of trade policy at Cornell University. Many economists worry that the sharp rise of the dollar will increase the likelihood of a global recession next year.

The dollar is up 18 percent this year and hit a 20-year high last month, according to the ICE US Dollar Index, which measures the dollar against a number of major currencies.

The reasons for the dollar’s rise are no secret. To combat rising US inflation, the Federal Reserve has raised the benchmark short-term interest rate five times this year, signaling the possibility of further hikes. This led to higher rates on a wide range of U.S. government and corporate bonds, attracting investors and boosting the U.S. currency.

Most other currencies are much weaker by comparison, especially in poorer countries. The Indian rupee has dropped nearly 10 percent against the dollar this year, the Egyptian pound 20 percent and the Turkish lira a staggering 28 percent.

Celal Kaleli, 60, sells baby clothes and diaper bags in Istanbul. Because it needs more lira to buy imported zippers and shirts priced in dollars, it has to raise prices for Turkish customers who are having trouble paying itself in the dwindling local currency.

“We look forward to the new year,” he says. “We will look at our finances and downsize accordingly. There is nothing else we can do.”

Rich countries are not immune. In Europe, already plunged into recession amid rising energy prices, a euro fell below $1 for the first time in 20 years and the British pound fell 18 percent from a year ago.

The sterling recently flirted with the dollar after new British Prime Minister Liz Truss announced massive tax cuts that muddied financial markets and led to the dismissal of the Treasury secretary.

‘Bad news’ for the global economy

A rising dollar is causing distress overseas in many ways, including making imports more expensive for countries [File: Brian Inganga/AP Photo]

Normally, countries can enjoy some benefit from falling currencies as it makes their products cheaper and more competitive overseas. Right now, however, any gains from higher exports are muted as economic growth bounces off almost everywhere.

A rising dollar is causing pain overseas in several ways:

  • In addition to existing inflationary pressures, it makes imports from other countries more expensive.
  • It squeezes companies, consumers and governments into debt in dollars. This is because more local currency is needed to convert to dollars when making loan payments.
  • It forces central banks in other countries to raise interest rates to support their currencies and prevent money from escaping their borders. But these high rates also weaken economic growth and increase unemployment.

Simply put, “The dollar’s appreciation is bad news for the global economy,” says Ariane Curtis of Capital Economics. “This is another reason why we expect the global economy to go into recession next year.”

In a tough neighborhood of Nairobi known for car repair and parts sales, businesses are in trouble and customers are unhappy. While the Kenyan shilling has dropped 6 percent this year, prices for fuel and imported spares have risen so much that some people are leaving their cars and opting for public transport.

“This has been the worst,” says Michael Gachie, director of purchasing for Shamas Auto Parts. “Customers complain a lot”

2022 is uniquely painful

A man holding a banknote as he leaves a foreign exchange shop in Istanbul.
The rising US dollar is uniquely painful as it adds to inflationary pressures when prices were already high in the wake of the Ukraine war. [File: Khalil Hamra/AP Photo]

Revolving currencies have caused worldwide economic pain many times before. For example, during the Asian financial crisis of the late 1990s, Indonesian companies borrowed heavily in dollars during boom times, then disappeared when the Indonesian rupiah collapsed against the dollar.

A few years ago, a falling peso inflicted similar pain on Mexican businesses and consumers.

However, the dollar rising in 2022 is uniquely painful. It adds to global inflationary pressures at a time when prices are already rising. Disruptions in energy and agriculture markets caused by the war in Ukraine magnified supply constraints from the COVID-19 recession and recovery.

In Manila, 29-year-old Raymond Manaog, who drives the colorful Philippine van known as a jeepney, complains that inflation – especially rising diesel prices – is forcing him to work harder to make a living.

“What should we do to earn enough for our daily expenses,” he says. “If we’ve traveled our routes five times before, now we’re doing it six times.”

In New Delhi, India’s capital, Ravindra Mehta has been successful for decades as a broker for American almond and pistachio exporters. But a record drop in the rupee – in addition to higher raw material and shipping costs – has made the hazelnuts much more expensive for Indian consumers.

Mehta says that in August, India imported 400 containers of almonds, up from 1,250 containers a year ago.

“If the consumer isn’t buying, it affects the entire supply chain, including people like me,” he says.

Kingsland Drinks, one of the UK’s largest wine bottlers, was already jamming due to higher costs for shipping containers, bottles, caps and energy. Now, the skyrocketing dollar is driving the price of wine he buys from vineyards in the United States and even in Chile and Argentina, which, like many countries, depend on the dollar for global trade.

Kingsland offset some of its currency costs by making contracts to buy dollars at a fixed price. But at some point, “these protections are running out and you have to reflect on the fact that the sterling is weaker against the US dollar,” says Ed Baker, the company’s chief executive officer.

Translation: Soon customers will have to pay more for their wine.